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Weak hair oil category growth spoiled performance 

Bajaj  Consumer’s  Q1FY23  print  was  impacted  due  to  muted  growth  in  the  Hair  Oil category. Revenue grew 15% (+12.8% QoQ), while EBITDA/PAT declined 32.9%/31.7% as demand  was  hit  in  key  Hindi  speaking  markets.  Overall  volumes  grew  14%,  ADHO volumes  remained  flat.  Management  said  it  witnessed  down?trading,  as  consumer  demand was  skewed  towards low?cost  hair  oils –  coconut  and  amla. However  direct reach in rural markets held on, urban growth was led by MT (+70%) and e?com scale up,  together contributed 14% of sales. GT channel grew single digit, though ‘Bajaj Star?Club’  program  pushed  wholesale  sales. With  clear  focus  on  direct  coverage,  and  revival  in wholesale channels we expect sharp recovery in FY23. To offset impact of inflation, the company  took  ~7.5%  price  increases.  Though,  gross  margin  slipped  407bp  to  54.5%. EBITDA margin  shrank  964bp  to  13.5%. Management  said  to  retain ad?spend~18%  of sales. We retain BUY, with a revised DCF?based TP of Rs221 (15.5x FY24E EPS).

ADHO (86% contribution) – weak hair oil category growth as consumer down?trade to Amla

In Q1FY23  company  reported  highest  revenues  at  Rs2.44bn  (+15%),  even  though  Hair Oil  category  saw muted growth with  flat value  (0.8%) and volume  (?0.4%). Management  said,  inflationary pressure continues to impact consumer spending and rural markets saw subdued growth as consumer demand skewed towards cheaper mass segments ? coconut and amla.  ADHO volumes remained flat owing to drop in hindi speaking markets (HSM), yet wholesale  contribution  dropped  to  22%.  Amla  sales  grew  45%,  garnering  3%  contribution.  Channel  growth: MT +70%, E?com +50% and GT flat; International business contributed ~3% of sales.  Nevertheless, newly launched Sarson Amla, Pure coconut and Coco?onion gaining traction in  GT/ MT channel. Management expects revival in wholesales channel in key HSM. Digital first  brands Natyv Soul, Bajaj  100%  pure  coconut and Almond+Argan  oil  coupled with  national launch of Coco?Onion gaining share in GT and MT appears to be promising.

Insistent inflation in key RM/PM hit at 13% impacted gross margins despite price increase

Gross margin slipped 407bp to 54.5% on account of steep rise in key commodities prices such  as LLP  (+33.8%), RMO  (+7.6%), and packing material. To offset vertical inflation  (13%),  the  company took 7.5% price increase and expects RM prices to soften in 2HFY23. Management  said it would continue to invest in ad?spends, ~18% of sales supporting: (1) core brand ADHO,  (2) Pure coconut and coco?onion in retail and  (3) Digital brands. EBITDA declined 32.9% to  Rs329mn reflecting EBITDA margins at 13.5% (?964bp). Management admitted that margins could remain under pressure for next two quarters. APAT declined 31.7% to Rs334mn.

Valuation and risks – retain BUY, with revised DCF?based target price of Rs221 

Bajaj Consumer has expanded its hair oil portfolio participating in ~85% of Rs130bn hair oil category with five sub brands expecting to scale up the top?line. With clear focus on ramping  wholesale channel and retail footprint coupled with improved execution we expect sustained  performance in FY23. Though margins could remain under pressure in the medium term. With  recovery  still  not  full?fledged  and  pressure  on  margins  to  be  persistent,  we  have  cut  FY23E/FY24E earnings by ~10%. We retain BUY, with a revised DCF?based TP of Rs221 (15.5x  FY24E EPS). Risks to our call include failure of NPD, over?dependence on ADHO, raw material  price inflation, and delays in price hikes.

Valuations

Bajaj Consumer has expanded its hair oil portfolio participating in  ~85% of Rs130bn hair oil category with five sub brands expecting to  scale  up  the  top?line.  With  clear  focus  on  ramping  wholesale  channel and retail  footprint coupled with improved execution we expect  sustained  performance  in  FY23.  Though  margins  could  remain under pressure in the medium term. With recovery still not  full?fledged and pressure on margins to be persistent, we have cut  FY23E/FY24E earnings by ~10%. We retain BUY, with a revised DCF? based TP of Rs221 (15.5x FY24E EPS). Risks to our call include failure  of NPD,  over?dependence  on ADHO,  raw material  price  inflation,  and delays in price hikes.

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