1Q a miss. That said, execution is (likely) improving, results (may) follow
1Q revenue grew 20.4% YoY (adjusted for sanitiser sales), however it declined 4.5% on 2-year CAGR basis. Rural continues to trend well along with some recovery in urban; wholesale continues to be impacted. RM pressure and weak product mix weighed on gross margins. While BaCo continues to execute well, we believe the results should be visible when things normalise.
We like it's focus on (1) investing in both brand building and distribution expansion and (2) focus on categories beyond ADHO (new product launches – ramping up Amla hair oil and launched Coconut hair oil), (3) new SKUs (filling white spaces). We stay believers - see report series "Value trap vs trapped value" - link 1, link 2 and link 3. BUY.
* Revenue growth driven by continued rural demand and recovery in urban:
Revenue grew 10% YoY to Rs2.2bn; two key things to note here (1) Q1FY21 had sanitiser sales of ~Rs175mn, adjusting for which revenue growth was 20.4% YoY, (2) 2-year revenue CAGR was down 4.5% (weak base). It highlighted that (1) Growth in ADHO is on the back of large packs, (2) urban has shown signs of recovery with retail being the key growth driver, and (3) van operations have got to pre-recent-lockdown levels and will be scaled up further. General trade revenue grew 6.2%. Revenue from alternate channels (modern trade, e-commerce etc.) grew 39.6% YoY driven strong growth in e-commerce growing and continued recovery in Modern Trade. International business revenue grew 58.6%. Key countries of Nepal, Bangladesh and GCC were impacted due to Covid-led restrictions.
* Margin decline due to higher input cost and inferior mix:
On a reported basis, gross margin declined 515bps YoY to 59.3% (lowest level in the last seven years). However, the fall in margin is actually higher if we consider the impact of sanitiser sales in Q1 – as mentioned above, sanitiser sales in Q1FY21 was Rs~175mn and we believe its margin would be 40%. The fall in margins was due to (1) input cost inflation (LLP and Refined Mustard Oil price increased by 49% and 47%, respectively, and (2) weak product mix – Bajaj is ramping up Amla Aloe Vera hair oil which has a lower margin than its core product. EBITDA margin was down 472bps YoY to 24.3%.
* Other highlight:
Bajaj Consumer launched coconut hair oil in July in select states; the 100ml SKU is priced Rs35 compared to Rs40 for Parachute. The distribution will be expanded to west and south India. We believe this is a good initiative as Bajaj looks to have a complete portfolio of hair oils in the medium term.
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