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Weak rural; though category headwind still persist

We recently met Bajaj Consumer to check the business momentum. The management cited hair oil category has seen persistent decline till May’22 in volume (-4.5%) and value (-3.1%). However slower growth in value add hair oils segment resulted in weak rural performance, yet coconut hair oils remained flat. That said, Bajaj’s secondary sales was higher than primary as company maintained its ad-spends and added new productssuch as Coco-onion, Natyv Soul, and Moisturizing soap. Moreover, modest pickup in wholesale channel seen as demand was hit harder in core Hindi speaking markets. Management said urban GT channel has recovered well coupled with good sales in MT/Ecom channels. While inflation woes adding pressure on margins, management expects to invest in brand advertising. We expect strong recovery in revenues ahead and retain BUY, with a DCF-based TP of Rs247 (15.5x FY24E EPS).

Weak hair oil category growth as consumer cut spends on hair oils

Management cited that in Apr/May the hair oil category saw persistent decline in volume (-4.5%) and value (-3.1%). Though coconut hair oils segment remained flat. Management attributed few reasons: (1) category decline was much sharper in rural compared to urban, (2) moderate pick up in wholesale channel more visible in the Hindi speaking markets, and (3) consumer demand skewed towards mass segments led by coconut hair oils. Further Bajaj’s secondary sales is exceeding primary as company added new products such as coconut, Amla aloe Vera, Sarson Amla, Coco-onion and moisturizing soap in addition to digital first brands Natyv Soul, Bajaj 100% pure coconut and Almond+Argan oil. Given the renewed focus on NPD coupled with distribution expansion and improvement is sales throughput (sales productivity) the management expects strong revival in sales. Further it believes rebound in wholesale channel given strong visibility for monsoon resulting in recovery in rural markets from June onwards.

Persistent inflation to weigh high on margins

We reckon, though copra prices remain deflationary, relentless inflation witnessed in key commodities such as LLP (+21%), RMO (+47%), and packing material to weigh high on margins. To offset vertical inflation, the company took price increase (7.5%), yet maintained that it would continue to invest in ad-spends(~18% of sales) supporting new products. Management admitted that near term margins could remain under pressure.

Valuation and risks – retain BUY, with DCF-based target price of Rs247

Bajaj Consumer has expanded its hair oil portfolio participating in ~85% of Rs130bn hair oil category. With clear focus on ramping wholesale channel and retail footprint coupled with improved execution we expect sustained performance. Though margins could be under pressure in the short term given no respite from sticky inflation. That said, we remain positive expecting strong recovery in hair oil category. We retain BUY, with a DCF-based TP of Rs247 (15.5x FY24E EPS). Risks to our call include failure of NPD, overdependence on ADHO, raw material price inflation, and delays in price hikes.

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