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Strategic initiative to revive growth

Bajaj Consumer Care (BAJAJCON IN) performance took a hit due to challenges in the growing core Almond Drop Hair Oil (ADHO) category, reduction in the wholesale channel, and slowdown in the hair oil space. Management has been focused on diversifying its ADHO brand in new categories and has acquired a South India-based brand Banjara to diversify the portfolio. We reiterate Accumulate as distribution initiatives are likely to improve ADHO growth hereafter with a reduced TP of INR 200 based on 20x FY27E P/E.

Muted domestic performance and international markets remain robust: Net sales declined by 2.7% YoY to INR 2.3bn in Q2, slightly below our estimates, with volume down by 2%. Almond Drops Hair Oil (ADHO) saw a low single-digit YoY decline while remaining flat QoQ vs the past quarter. Large- and mid-sized SKU reported flat growth and sachets contracted. Value-added hair oil as a category underperformed while coconut hair oil delivered 19% YoY growth in 9MFY25. Almond Drop Hair extension registered growth of 39% YoY in 9MFY25. In terms of channels, general trade continues to be under pressure amid slower demand environment while the organized trade channel (30% of sales), increased 22%, driven by a 39% rise in eCommerce. The international business (~7% contribution) posted 23% YoY growth in Q3 where the company expects Bangladesh and the Middle East to outperform.

Acquisitions and distribution initiatives to drive growth: BAJAJCON announced an acquisition of Banjara, a South India-based natural brand in personal care (hair care – 48%, skin care – 52%) valued at an EV of ~INR 1.1bn – 2x sales. It reported a 14% CAGR during the past four years, with a revenue of INR 515mn in FY24, gross margin of 60%, and single-digit EBITDA margin. The rationale behind this acquisition is to 1) play ‘Naturals’ i.e. 40% of the beauty personal care (BPC) market, and 2) enhance its current reach by 2x across five States in South India. Moreover, Project Aarohan (launched in Q1) saw significant progress as it has fully rolled out in Uttar Pradesh (UP) and Madhya Pradesh (MP) expanding direct coverage of urban outlets by 1.4x and 1.6x, respectively. Further, in the Phase 2 of the project, the company plans to cover five additional States in the next four quarters.

EBITDA margin drags due to higher cost: EBITDA margin dropped 343bp YoY to 12.4%, below our estimates of 14.6% due to 1) lower margin in coconut oil (which had higher saliency), leading to a gross margin loss of 127bp YoY, 2) increased Other expenses on account of Project Aarohan, and 3) rise in manpower cost for retail coverage & one-time expenses of IT infrastructure. The company has taken a 5% price hike and plans another round to offset hyper-inflation in copra.

Reiterate Accumulate with a lower TP of INR 200: We cut our earnings by 9% for FY25E, 19% for FY26E and 20% for FY27E to factor in lower revenue growth and a sharp decline in margin due to scale-up in new portfolio and initiatives taken to revive ADHO. We reiterate Accumulate with a lower TP of INR 200 from INR 230 on 20x (unchanged) FY27E P/E. Downside risk is the sustained slowdown in ADHO.

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