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Add Bajaj Consumer Care Ltd For Target Rs.174

Performance worsens due to continued rural slowdown and category decline; maintain ADD on valuations but no near‐term triggers

Our view Bajaj Consumer posted another quarter of weak performance both on revenue and margin fronts hit by a 6.5% category decline for hair oils coupled with a higher than expected 17.5%/29% inflation in LLP and RMO prices. Collapse in rural demand for premium hair oils and downtrading in favor of cheaper oils like amla and coconut further impacted revenues. While the company continues to face headwinds on account of rural demand slowdown and commodity headwinds hitting at the same time which we expect to continue in H1FY22 but some company’s aggressive diversification initiatives and marketing spends on both ADHO and new brands, cost saving initiatives and some recovery in hair oil category performance should get the earnings trajectory back on track gradually towards from FY24 onwards. Given aggressive marketing spends, difficulties in taking up prices further and higher contribution from margin dilutive new products, we now expect the company to work at much lower than historical margin levels at around 18%. We like the company’s strategy of diversifying its portfolio with focus on ramping up distribution network and innovation‐led growth but remain skeptical about the time being taken for this transformation. While the stock has significantly underperformed peers and trading at undemanding valuations, we do not see any near‐term triggers which can prop up valuations and hence maintain our ADD rating. We would suggest slowly accumulating the stock on result‐driven weakness as we remain positive on the longer‐term prospects of the category which should see some recovery after many quarters of continued weakness.

Result Highlights

* Result summary – Revenue/EBITDA/PAT decline of 12.3%/43.7%/34.5%. Revenue decline led by 6.5% category decline ‐ 6% in Hindi belt and 7% in urban market. Double‐ digit decline in wholesale channel while retail channel grew 3%.

* Margins – Gross margin lower by 450bps to 57% impacted by inflation in RMO and LLP prices. EBITDA margin also dipped 890bps to 15.9%; Employee and other expenses were stable during the quarter. A&P spends grew 100bps QoQ to 19%.

* Earnings and dividend– PAT decline of 34% led by sharp margin contraction coupled with revenue decline. Declared final dividend of Rs 4/share taking total dividend to Rs8/share.

Valuation

After a sharp cut of 10‐15%% to our FY23/24 earnings estimates to factor in slower growth and lower margins, we now build in muted revenue/EBITDA/PAT growth of 4%/0%/0% over FY22‐24E. We cut our estimates to factor in category decline and margin headwinds in near‐term and lower our TP to Rs 174 and maintain our ADD rating on the stock based on 15x FY24E earnings. Upside risk would be quick success in non‐ADHO portfolio, ramp‐ up in international business and further increase in addressable market.

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