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Lower than expected performance due to margin decline; Downgrade to NEUTRAL as no near?term triggers 

Our view

Bajaj Consumer posted another quarter of weak performance on margin fronts hit by a rural slowdown for hair oils coupled with a higher than expected 30% inflation in LLP. Revenue grew 15% YoY but 3?yr revenue CAGR is still lower at 1.2%. Muted urban demand and slowdown in rural demand continue to impact margins. Key positive was increase in MT and e?commerce traction, decrease in RMO prices and comeback of wholesale busienss. 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 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 downgrade from Add to NEUTRAL 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 growth of 15.1%/?30.6%/?30.7%. 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 420bps to 55.5% impacted by inflation in LLP prices. EBITDA margin also dipped 960bps to 14.6%; Employee expenses were stable while other expenses were higher 47% YoY. A&P spends grew 510bps YoY to 18.7% of sales.

* Earnings and dividend– PAT decline of 30.7% led by sharp margin contraction coupled with lower other income.

Valuation

We maintain FY23/24 earnings estimates to factor in slower growth and lower margins, we build in muted revenue/EBITDA/PAT growth of 4%/0%/0% over FY22?24E.  we maintain TP to Rs 174 on the back of near?term category sluggishness and margin headwinds and downgrade from Add to NEUTRAL 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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