Published on 24/07/2019 10:39:37 AM | Source: ICICI Securities Ltd

Buy Bajaj Corp Ltd For The Target Rs.400 - ICICI Securities

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Bajaj Consumer’s (BaCo) volumes grew 5% despite subdued demand in both urban and rural general trade (+3% volumes). Modern trade and International markets (~10% combined salience) contributed 200bps to overall volume growth. We do note that this performance was on the back of aggressive consumer promotions – 3.5% price / mix growth lagged price hike of 7%. We believe that BaCo will continue to invest the input cost benefits to drive growth – sole focus on increasing penetration in Almond Drops Hair Oil (ADHO). It increased direct coverage to 0.5mn outlets. We like the BaCo story of renewed focus on total hair oil rather than diversification. Retain BUY. We are hosting BaCo results conference call on July 16, Tuesday, 1100 hours IST. Dialin number +91 22 6280 1144.

* General trade under pressure; alternate channels, international drive growth: Revenue / EBITDA / PAT grew 9% / 2% / 9% respectively. General trade revenue grew 6% as demand remained sluggish in both rural and urban. Wholesale channel witnessed a sharper sequential slowdown. BaCo did no business in the Canteen Stores Department (CSD) due to procedural issues in the channel. On the other hand, Modern Trade (MT), e-commerce and Pharma channels continued strong growth performance – up 23%, 217% and 117% respectively. International business growth on the back of a soft base (business reboot completed in FY2019) added 250bps to company revenue growth.

* Benefits from price hikes, input costs invested to drive growth through consumer promotions, ad-spends: Gross margin expanded 110bps with subdued input costs – prices of LLP and refined oil increased only 0.5% and 2.6% YoY. However, EBITDA margin declined as BaCo continued to invest to drive growth. Price / mix growth of 3.5% was lower than the ~7% price hike to drive growth in ADHO through higher consumer promotions, in our opinion. We also note that higher A&SP cost (+25% YoY) was primarily to drive penetration in ADHO and support the newly launched cooling hair oil (aggressive media campaign in Apr-May’19).

* New cooling hair oil reported promising results: Bajaj Cool Almond Hair Drops witnessed highest offtake amongst new launches in hair oils. BaCo reported Rs16.3mn consumer offtake (1.3% market share in the cooling hair oil) in June 2019.

* Valuation and risks: We model revenue / EBITDA / PAT CAGRs of 12% / 12% / 12% over FY2019-21E. Maintain BUY with DCF-based target price unchanged at Rs400. At our target price, the stock will trade at 21x P/E Mar’21E. Key downside risk is over-reliance on a single brand – ADHO. 


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