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Value Trap or Trapped Value #5

Bajaj Consumer (BaCo), Emami and Jyothy Labs (JYL) – the trio – continue to trade at a considerable discount to Consumer Staples peers (all three companies (still) appear great value picks). These companies have gradually improved execution with: 1) focus toward distribution expansion, 2) improving performance in new-age channels, 3) diversifying their product portfolio (acquisitions, digital-first launches). We believe, with consumer demand environment improving and deceleration in commodity inflation (which were headwinds over last couple of years), the performance of the trio will likely improve and potentially drive higher valuations. While JYL remains our top pick (up 60% in last 3 months), we expect BaCo and Emami’s performance to improve in the near term and drive stock rerating.

Improving consumer demand outlook and deceleration in commodity inflation may drive performance of core segments / brands

We believe, improving consumer demand outlook and correction in key raw material prices are likely to drive growth and profitability of core segments / brands for the trio. BaCo and Emami are likely to witness improvement in performance of their core segment. In BaCo, decline in hair oil category over last couple of years with further downtrading from light hair oils category impacted performance of Almond Drops Hair Oil (ADHO). In Emami, healthcare range, pain management range and cooling hair brand Navratna improved household penetration during covid but later got impacted due to high consumer inflation post covid. Jyothy continues to perform well with volume-led market share gains, which is likely to witness further acceleration. We also expect normalisation of the trio’s gross margins with input cost correction providing them with more resources to invest in their brands.

Distribution expansion – a key driver for increasing penetration of brands

While larger Consumer Staples peers have limited scope for distribution expansion, the three players under reference have significant scope for increasing penetration for their brands. BaCo, Emami and JYL’s have overall reach of 4.3mn, 4.9mn and 2.8mn outlets, respectively. All the three companies have been focusing on increasing their direct and overall reach to improve outlet productivity and increase penetration of their brands. In our view, these players will likely realise the benefits of their investments in tandem with improving consumer demand outlook.

Significant improvement of performance in new-age channels

Low salience of new-age channels (modern trade and e-commerce) in revenues was one of the concerns (among consensus) about these three players as the said channels are growing fast and increasing their salience in the overall FMCG category. All three have invested (channel-specific SKUs, digital-first launches, etc.) to improve their performance in these channels. Noteworthy is that BaCo and Emami have witnessed significant improvement in the salience of new-age channels from ~7% and ~9% of revenues to ~16% and ~19%, respectively (largely comparable to large FMCG players).

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