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Steadily improving fundamentals

We recently interacted with the senior management of Bajaj Consumer. Despite challenging market conditions, we found the company’s fundamental strategy taking shape, even as demand for hair oils is picking up. Further, its foray into sub-segments such as Amla and Coconut appears to be strategically right, as it would help gain distribution momentum for its core brand ADHO across the country, more importantly in the South.

Management said, though coconut hair oil would be key driver for distribution it would wisely spend on the brand. In the short term, EBITDA margins may contract, but should revert to 25-26% in our view. We remain upbeat on senior management overhaul, driving execution capabilities across sales, marketing, e-com and international verticals. We retain our BUY rating, with a DCF-based target price of Rs384 (18.7x FY23E EPS).

Focus on building ADHO distribution through entry into new segments

The management remained upbeat, with continued focus on building distribution for ADHO in urban markets through new product intervention (sub-segments) such as Amla and Coconut. The South and West markets are driven by Coconut franchise. However, Amla is preferred in the Hindi-speaking region. The management targets to expand its retail distribution to 1mn+ from the current 0.85mn, which could result in lower dependence on wholesale channel. Also, the management said it is committed to launching 2-3 new products exclusively for the e-com channel, driving its contribution to ~5%. In addition, it expects to add two more products in adjacent hair oil categories in the next few quarters, garnering ~Rs1bn revenue from each in the next two-three years.

Senior management team in place; could drive execution capability further

The company has revamped senior management team across sales, marketing, e-com and international verticals, which should improve its ability to think through business opportunities and also improve its execution capabilities. With the international piece getting stitched in terms of strategy, product positioning and distribution footprint, we believe it provides big headroom for growth in South Asia and the SAARC region post roll out of the international strategy.

Valuation and risk

With ramp-up in its offerings in three sub-segments (Light Hair Oil, Amla, and Coconut), coupled with senior management team in place, we expect sharp rebound in sales. Further, distribution-led retail focus and efforts on reviving e-com could enhance its consumer base, in our view.

Despite 5% price increases, inflationary cost pressure and brand investments may impact margins in the near term; however, we expect margins to recover with improved scale. We expect improved execution to drive sustained performance for the company. We remain positive and retain our BUY rating, with a DCFbased target price of Rs384 (18.7x FY23E earnings). Risks to our call include failure of new products in the market, over-dependence on ADHO, rising competition in key hair oil segments raw material price inflation, and delays in price hikes.

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