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Muted quarter hit by category slowdown and input costs, but improving execution and cheap valuations make us retain BUY

Our view

While Bajaj Consumer posted a very weak Q2 performance both on revenue and margins front primarily driven by a 2% hair oil category decline coupled with 40‐50 % inflation in LLP and RMP prices, some small positive takeaways were market share gains in Amla category, good acceptance for coconut oil and launch of a new digital first brand Natyv Soul. While the company is facing headwinds on account of rural demand slowdown and commodity headwinds hitting at the same time, we expect a steady uptick in category demand, more pricing actions, cost saving initiatives and new launches in getting the earnings trajectory back on track gradually. We like the company’s strategy of diversifying its portfolio with focus on ramping up distribution network and innovation‐led growth. Given the stock has already been underperforming and valuations are undemanding, would suggest buying into the stock on result‐driven weakness as we remain positive on the medium‐term prospects.

Result Highlights

* Result summary – Revenue/EBITDA/PAT decline of 4.7%/23%/18.3%. Revenue decline led by 1% category decline in rural market and muted urban market. Non‐ hair oil category including sanitizers declined 64% while International revenue decreased from Rs69mn in Q2FY21 to Rs59mn implying 15% decline.

* Category and channel performance – Volume decline of 0.7% in Q2, category declined by 8.2% in key markets like UP, Bihar, MP where Bajaj is over‐indexed while it grew 6% in other markets where Bajaj is under indexed. GT plunged 9%, MT grew in mid‐teens while E‐com grew 2x with 4% contribution to total sales.

* Margins – Gross margin at 59.8 vs 66.6% YoY led by steep RM inflation, taken 5% price hike in 1H and 2% in Nov, EBITDA margin came in at 22.2% vs 27.5% YoY and are expected to remain in the 22‐23% range in near‐term.

* Other highlights – Company has launched a digital first premium brand in Hair Care and Personal care space NatyvSoul in October, overall market share at 10.8% led by sharp increase to 3% share in Amla oil, witness continued downtrading with amla/coconut oil doing better and wholesale channel facing liquidity issues.  

Valuation

We build in revenue/EBITDA/PAT growth of 8%/5%/5% over FY21‐24E. We cut our estimates by 10‐11% to factor in category growth and margin headwinds in near‐term and lower our TP to Rs 315 but reiterate our BUY rating on the stock based on 18x FY24E earnings. We can see a further re‐rating once we see more success in non‐ADHO portfolio, ramp‐up in international business and further increase in addressable market.

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