Bajaj Corp Ltd Bloomberg Code: BJCOR IN

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1 Consumer Staples-Household Products Bloomberg Code: BJCOR IN India Research - Stock Broking In Pursuit of Excellence, with Almond Drops Hair Oil Leading position in Light Hair Oil market and Well established brands to surge revenue growth: Bajaj corp is one of the leading players in FMCG sector in hair care category. Bajaj Almond Drops hair oil is market leader in the light hair oil segment with more than 6% of market share and major revenue contributor for the company. Despite the adverse market condition in the hair oil industry, Bajaj corp managed to register 2.9% growth in the sales volume and 4.1% increase in realisation per case for Almond Drops Hair Oil (ADHO) brand. However, the consumption demand is expected to improve considerably on the back of expected good monsoons in FY17E, after two consecutive years of poor rains. Good monsoons are likely to improve disposable incomes of rural India and hence consumption demand would be boosted. This would help the company to post moderate growth in coming years. Increasing outlets to tap rural markets to push growth: Bajaj corp is continuously focusing towards improving its presence and strengthening its portfolio to drive higher revenue growth. At present, 42.% of Bajaj Almond Drops hair oil sales are from rural areas only and the company managed to capture 63.2% market share in rural areas. Bajaj corp managed to come up with.89mn outlets during FY16, out of which.43mn were opened in urban area and.46mn in rural area. Valuation and Outlook Bajaj corp is market leader in Light Hair oil segment and more than 91% of its revenues are coming from ADHO only. Bajaj corp, with its credentials of debt free, healthy ratios and healthy cash flows, is currently trading at 2.3x FY18E EPS. We value the company at 24.x FY18E EPS and initiate the coverage on the company with BUY rating, for a target price of Rs. 465, representing an upside of 18% for a period of 9-12 months. Key Risks yfluctuations in raw material prices. ydepending on a single product ADHO. ycompetition from existing and new entrants. Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales EBITDA EBITDA Margin (%) Net Profit EPS (Rs.) RoE (%) PE (x) , *Represents multiples for FY14, FY15 & FY16 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Jun 2, 216 BUY CMP (as on Jun 1, 216) 394 Target Price 465 Upside (%) 18 Stock Information Mkt Cap (Rs.mn/US$ mn) 5813 / wk High/Low (Rs.) 522 / 356 3M Avg. daily volume (mn).1 Beta (x).6 Sensex/Nifty / 818 O/S Shares(mn) Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 66.9 FIIs 23. DIIs 3.9 Others 6.3 Stock Performance (%) 1M 3M 6M 12M Absolute 2 2 (9) (12) Relative to Sensex (3) (8) (12) (11) Source: Bloomberg Relative Performance* Jun-15 Jul-15 Aug-15 Sep-15 Source: Bloomberg; *Index 1 Analyst Contact Jagannadham Thunuguntla Oct-15 Bajaj Corp Nov-15 Dec-15 jagannadham.t@karvy.com Jan-16 Feb-16 Mar-16 Apr-16 Sensex May-16 Jun-16 1

2 Jun 2, 216 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY15 FY16 FY17E FY18E Net sales Optg. Exp EBITDA Other & Exceptional Items (154) (184) Depreciation Interest PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net margin (%) P/E (x) EV/EBITDA (x) Dividend yield (%) Balance sheet (Rs. Mn) FY15 FY16 FY17E FY18E Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Short Term Debt Current Liabilities Other Liabilities Balance Sheet Ratios RoE (%) RoCE (%) Debt/Equity.... Equity/Total Assets P/BV (x) Exhibit 2: Shareholding Pattern (%) Company Background Bajaj Corp Limited (Bajaj corp), incorporated in the year 26, is a company engaged in the trading and manufacturing of cosmetics, toiletries and other personal care products. Bajaj corp has leadership position in hair care segment. Its brand portfolio consists of Almond Drops hair oil, Amla hair oil, Brahmi hair oil and Nomarks. The company s principal product is Almond Drops hair oil, which is the market leader with over 6% share in the Light hair oil market. Almond Drops is 2nd largest brand in the overall hair oil segment. Bajaj corp is also producing oral care products under the brand name Bajaj Black Tooth powder. Bajaj corp has hair oil manufacturing facilities in Himachal Pradesh, Uttarakhand, Rajasthan and Guwahati. Bajaj corp has registered its brand Bajaj Nomarks in international markets also like Gulf Cooperation Council (GCC), Nepal, Malaysia, Australia, etc. Now the company is delivering its products through 3.71mn retail outlets serviced by 7392 distributors or stockists and more than 15, wholesalers. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY15 FY16E FY17E FY18E PBT Depreciation Interest (net) Tax (459) (538) (57) (715) Changes in WC 135 (369) 37 (235) Others (65) (285) CF from Operations Capex (8) (66) (86) (99) Investments & Others (187) (642) (16) (184) CF from Investing (195) (78) (246) (283) Change in Debt 1 Dividends & Other (235) (241) (241) (241) CF from Financing (235) (1941) (241) (241) Change in Cash (164) (764) Soap 1.6% Promoters 66.9% FIIs 23.% DIIs 3.9% Hair Oil 92.5% Facewash 2.3% Cream 3.% Others 6.3% Others.6% Source: BSE, Karvy Research 2

3 Leading position in Light Hair Oil market and Well established brands to surge revenue growth: Jun 2, 216 Bajaj corp is one of the leading players in FMCG sector in hair care category. At present, the company is operating in three verticals namely Hair care, Skin care and Oral care segments. Its brand portfolio includes ADHO, Amla Hair Oil (AHO), Brahmi Hair Oil (BHO) and Nomarks. Bajaj Almond Drops hair oil is market leader in the light hair oil segment with more than 6% of market share and major revenue contributor for the company. ADHO is 2nd largest brand in the overall hair oil segment and its premium position commands one of the highest unit prices in the industry. ADHO is contributing more than 91% of total revenues on the back of continuous investment in advertising and increasing distribution channels. The investment in advertising and sales promotion has helped the company to gain market share and to remain second largest hair oil brand in the Indian hail oil industry in terms of value. Despite the adverse market condition in the hair oil industry, Bajaj corp managed to register 2.9% growth in the sales volume and 4.1% increase in realisation per case for ADHO brand. However, the consumption demand is expected to improve considerably on the back of expected good monsoons in FY17E, after two consecutive years of poor rains. Good monsoons are likely to improve disposable incomes of rural India and hence consumption demand would be boosted. This would help the company to post moderate growth in coming years. Exhibit 4: Almond Drops Hair Oil sales volumes % 19.9% % 4 3 1% % 2.9% 1 5% 4.% % Sales volumes (No.of cases) Growth (%) % 2% Exhibit 5: Almond Drops Hair Oil sales value % % 29.9% % % 7.2% Sales value (Rs. Mn) Growth (%) 3% 2% 1% % Exhibit 6: Almond Drops Hair Oil Market in India - Volumes % % % % % % Volume (KLtr) Growth (%) 3% 2% 1% % -1% Exhibit 7: Almond Drops Hair Oil Market in India - Value % 25.6% 22.5% % 15.4% 4.2% Value (Rs. Mn) Growth (%) 4% 3% 2% 1% % Exhibit 8: Market Share Trends in the Light Hair Oil Category 65% 55% 45% 35% 25% 5% -5% 49.1% 53.% 51.9% 55.% 54.4% 56.9% 56.6% 58.4% 57.7% 59.7% 57.9% 6.2% Volume (%) Value (%) Bajaj corp is continuously improving its market share in the light hair oil category in terms of volume and at the same time in terms of value also. Its market share in terms of volume stood at 38.4% in FY8 and the same increased to 57.9% by FY16 grown at a CAGR of 5.3%. And market share in terms of values stood at 4.3% in FY8 and the same increased to 6.2% by FY16 grown at a CAGR of 5.1%. 3

4 Jun 2, 216 Increasing outlets to tap rural markets to push growth: Exhibit 9: Rural-Urban break-up of Light Hair Oil market Exhibit 1: Number of stockists/distributors FY12 FY13 FY14 FY15 FY16 Rural Urban Bajaj corp is continuously focusing towards improving its presence and strengthening its portfolio to drive higher revenue growth. Penetration into rural markets will offer a huge growth opportunity and Bajaj corp is well handling to capture the market share. At present, the brand is presented through more than 7392 distributors and is now available in more than 3.71mn outlets. Bajaj corp also started new initiation called, Rural Van operations to cover more rural areas and to increase its brand reach. At present, Bajaj corp is operating 12 vans to cover 7765 uncovered towns and villages on a monthly basis. Considering the importance of rural market in its strategy, the company is planning to tap the increase in disposable income of rural India and to convert rural consumer from unbranded to branded products. At present, 42.% of Bajaj Almond Drops hair oil sales are from rural areas only and the company managed to capture 63.2% market share in rural areas. Bajaj corp managed to come up with.89mn outlets during FY16, out of which.43mn were opened in urban area and.46mn in rural area. Market share of Light Hair Oil from rural area is 38% and it is 62% from urban areas on the back of relatively high pricing. Exhibit 11: Retail Outlets (in Mn.) FY13 FY14 FY15 FY16 Urban Distribution Rural Distribution FY13 FY14 FY15 FY16 Urban Distribution Rural Distribution Decline in raw material prices to boost EBITDA margins: As a result of sharp decline in the crude oil prices, the prices of Light Liquid Paraffin also declined drastically which is key raw material/input of the product. EBITDA margins are improved on the back of decrease in the cost of material consumed. Cost of raw materials as a percentage of total revenue is decreased by 289 basis points to reach 28.% in FY16 from the levels of 3.9% in FY15. We expect the raw materials prices continue to fall for FY17E and remain constant at those levels in FY18E, which affects EBITDA margins to reach 3.5% for FY17E and 29.6% in FY18E. Bajaj corp is also incurring more than 17% of its total revenues on Advertising and Sales Promotions, which could help the company to create more brand value. Exhibit 12: Rates of Light Liquid Paraffin (LLP) % 25.6% % % -.2% % 55 5% 3% 1% -1% -3% -5% Rates of Light Liquid Paraffin (Rs. Per kg) Growth (%) Exhibit 13: Advertisement and publicity (Rs. Mn) % % % % 1468 FY12 FY13 FY14 FY15 Advertisement and Sales Promotion As a % of Total Revenues 19% 16% 13% 1% 4

5 Jun 2, 216 Exhibit 14: Brandwise Sales Break-Up (%) Almond Drops Hair Oil Nomarks Amla Hair Oil Brahmi Amla Hair Oil Others Exhibit 15: Comparative Prices of Different Brands for 1 ml in the Hair Oil Segment (MRP of 1ml (Rs.)) Own Brands (Rs.) Competitor Brands (Rs.) Amla Hair Oil Brahmi Amla Hair Oil Almond Drops Hair Oil Kailash Parbat Hair Oil Parachute Keo Karpin Dabur Vatika Dabur Amla Hair & Care Navratna Almond Drops has created a unique positioning for itself through initiatives like product differentiation (Almond based), focused marketing, unique packaging (glass vs. plastic used by competition etc.) Growth in the FMCG sector will be the key driver: India is one of the largest populated countries in the world with more than 1.2 Bn people. India s population is growing at a rate of 1.41% annually. It is a young country with almost 65% of the population below the age of 3 years. The consumption of goods will therefore be driven by younger and more affluent consumers. Rising incomes, growing youth population and brand consciousness have been key growth drivers of the sector. Low penetration levels in rural market offer room for growth. The overall market size of FMCG in India is estimated to grow at a CAGR of 17% from US$47.3 Bn in 215 to US$13.7 Bn in 22E. The urban segment is the largest contributor to the sector, accounting for more than 6% of total revenue and had a market size of around US$ Bn in 215. Semi-urban and rural segments are growing at a rapid pace; they currently account for 4% of revenues. The rural FMCG market expected to increase at a CAGR of 18.1% to US$1 Bn during FY12-FY25E. The overall rural FMCG consumption continues to grow at 12.5% during FY14. Total consumption expenditure to reach nearly US$3.6 Tn by 22 from US$1.3 Tn in 212. India has 7% of its population living in rural areas. With rising urbanization, more people will have exposure to modern products and brands; and thus shift to branded and packaged goods and products. Exhibit 16: FMCG market (US$ Bn) Exhibit 17: Urban/Rural industry break-up (215) Rural 4% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY15 FY2E Urban 6% Source: India Brand Equity Foundation (IBEF), Karvy Research Source: IBEF, Karvy Research 5

6 Jun 2, E FMCG market size: US$47.3 Bn Growing demand: 1. Rising incomes and growing youth population have been key growth drivers of the sector. Brand consciousness has also aided demand. 2. Tier II/III cities are witnessing faster growth in modern trade. Attractive opportunities: 1. Low penetration levels in rural market offer room for growth. 2. Disposable income in rural India has increased due to the direct cash transfer scheme. 3. Growing demand for premium products. FMCG market size: US$13.7 Bn Advantage Indian Higher investments: 1. Many players are expanding into new geographies and categories. 2. Organized retail share is expected to double to 14-18% of the overall retail market by 215. Policy support: 1. Investment approval of up to 1% foreign equity in single brand retail and 51% in multi-brand retail. 2. The minimum capitalization for foreign FMCG companies to invest in India is US$1Mn. Source: IBEF, Karvy Research Hair oil market in India: FMCG: Rs Bn Hair Care: Rs Bn 7% CONTRIBUTION Shampoo Rs Bn (3%)* Perfumed Oil Rs Bn (28%)* Coconut Based Oil Rs Bn (24%)* Hair Conditioners Rs. 4.6 Bn (2%)* Hair Dyes Rs. 3.4 Bn (16%)* Hair Oil Market Coconut based Oils (46.5%)** Amla based Oils ()** Light Hair Oils (16%)** Cooling Oils (9%) ** Others (13.5%)** Perfumed Hair Oil Segment Hair oil market size in India is pegged at around Rs Mn with coconut-based oils accounting for 46.5% which comes to Rs.4697 Mn. Non-coconut or perfumed oil segment, in which Bajaj corp operates, has a market size of Rs.5336 Mn. Among all, Light Hair Oil is the fastest growing segment and around 38% of the light hair oil sale comes from the rural market. For FY16, volume for Light Hair Oil has witnessed 4.4% growth rate and value has grown at 6.6% to reach Rs.162 Mn. Volume in the case of Overall Hair oil has witnessed.5% growth rate and value has grown at 6.6% to reach the current levels. 6

7 Jun 2, 216 Exhibit 18: Light Hair Oil Market Volume in India % 12.5% 11.9% 6.6% % 4.4% % 2% 1% 5% % -5% Exhibit 19: Light Hair Oil Market Value in India % 21.4% 17.% 12.4% % 6.6% % 25% 5% -5% Volume (KLtr) Growth (%) Value (Rs. Mn) Growth (%) Exhibit 2: Overall Hair Oil Market Volume in India % 3.9% 1.2% % % -6.5% 2 Volume (KLtr) Growth (%) % 5% % -5% -1% Exhibit 21: Overall Hair Oil Market Value in India % 12.7% 13.6% % 6.9% 6.6% Value (Rs. Mn) Growth (%) 25% 2% 1% 5% % Exhibit 22: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16E FY17E FY18E Comments Revenue Revenue Growth (%) EBITDA EBITDA Margins (%) PAT (normalized) EPS (Rs.) Capex (8) (66) (86) (99) Net CFO Net Debt (1342) (478) (646) (717) Free Cash Flow We expect the revenue to grow on the back of good monsoons in FY17E and improved disposable incomes of Rural India. EBITDA is likely to grow from Rs.2392mn in FY15 to Rs.3285mn in FY18E. We expect the EBITDA margins to be stable by FY18E. PAT margins are expected to reach 25.8% in FY18E. 7

8 Jun 2, 216 Exhibit 23: Revenue Growth % 22.9% 1.7% % 6.2% 1.% % FY13 FY14 FY15 FY16 FY17E FY18E 3% 2% 1% Revenue (Rs. Mn) Revenue Growth (%) Bajaj corp registered revenue growth rate of 6.2% in FY16, which is lower than earlier years due to the adverse market condition in the hair oil industry, despite the same they managed to register 2.9% growth in the sales volume and 4.1% increase in realisation per case for ADHO brand. We expect the revenues to grow better on the back of expected good monsoons in FY17E and improved disposable incomes of Rural India. Revenues were grown at a CAGR of 16.7% for FY12-16 and we expect revenues will grow at a CAGR of 12.5% over FY16-18E. Bajaj corp is consistent in maintaining its EBITDA margins and EBIT margins every year. EBITDA margins and EBIT margins were at 31.2% and 33.9% respectively by FY16 and margins were expected to taper a little on the back of fluctuations in raw material prices to reach 29.6% and 32.3% by FY18E. EBITDA and EBIT were stood at Rs.2737 Mn and Rs.2974 Mn respectively in FY16 and were expected to reach Rs.3285 Mn and Rs.3576 Mn respectively by FY18E. Exhibit 24: EBITDA margins % 31.2% 3.5% 29.6% 29.% FY14 FY15 FY16 FY17E FY18E EBITDA (Rs. Mn) EBITDA Margins (%) 32% 3% 28% 26% 24% Exhibit 25: EBIT Margins % 33.% 32.2% 33.% 32.3% FY14 FY15 FY16 FY17E FY18E EBIT (Rs. Mn) EBIT Margins (%) 36% 34% 32% 3% Exhibit 26: PAT Margins to improve % 22.8% 27% % 2.9% 22.4% FY14 FY15 FY16 FY17E 243 FY18E % 19% PAT for Bajaj corp grew at a CAGR of 13.1% during FY12-16 to reach Rs.1964 Mn by FY16 from Rs.121 Mn in FY12. Profits are likely to jump from Rs.1964 mn in FY16 to Rs.2859 mn in FY18E as amortization of patents/trademarks may complete in FY17E. PAT is expected to grow at a CAGR of 2.7% over FY16-18E. PAT (Rs. Mn) PAT Margins (%) Exhibit 27: Healthy Return Ratios FY14 FY15 FY16 FY17E FY18E RoE (%) RoCE (%) We expect the RoE and RoCE to reach 51.% and 63.7% respectively by FY18E. RoE & RoCE have been healthy for the last 4 years and is expected to grow further in the next couple of years. RoE will be improved on the back of increasing PAT margins. RoE and RoCE were stood at 4.5% and 61.3% respectively in FY16. 8

9 Jun 2, 216 Exhibit 28: Dividend Payout 11% 98.2% 9% 7% 64.4% 86.4% 69.8% 59.3% At present, the company is paying Rs.11.5/- dividend per share and dividend payout has been more than 5% on an average. The company has good track record of regularly paying dividends and we expect consistency going forward. 5% FY14 FY15 FY16 FY17E FY18E Dividend Payout Ratio (%) Exhibit 29: Healthy operating and Free cash flows FY14 FY15 FY16E FY17E FY18E Operating cash flows (Rs. Mn) Free cash flows (Rs. Mn) Bajaj corp managed to generate better operating cash flows on the back of consistent revenue growth and better margin expansions. Operating cash flows and Free cash flows are likely to be stabilized for the coming years also. Exhibit 3: Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 9

10 Jun 2, 216 Valuation & Outlook Bajaj corp is market leader in Light Hair oil segment and more than 91% of its revenues are coming from ADHO only. Bajaj corp, with its credentials of debt free, healthy ratios and healthy cash flows, is currently trading at 2.3x FY18E EPS. We value the company at 24.x FY18E EPS and initiate the coverage on the company with BUY rating, for a target price of Rs. 465, representing an upside of 18% for a period of 9-12 months. Exhibit 31: PE Band Exhibit 32: PB Band Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 PE Average SD1 SD2-1SD Source: Prowess, Karvy Research Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 PB Average SD1 SD2-1SD Source: Prowess, Karvy Research Exhibit 33: EV/EBITDA Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 EV/EBITDA Average SD1 SD2 -SD1 Source: Prowess, Karvy Research Key Risks yfluctuations in raw material prices. ydepending on a single product ADHO. ycompetition from existing and new entrants. 1

11 Jun 2, 216 Financials Exhibit 34: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues Growth (%) Operating Expenses EBITDA Growth (%) Depreciation & Amortization Other Income EBIT Exceptional Item Interest Expenses PBT Tax Adjusted PAT Growth (%) (1.4) Exhibit 35: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Bank Balances Sundry Debtors Inventory Loans & Advances Gross Block Net Block CWIP 7 7 Miscellaneous Total Assets Current Liabilities & Provisions Debt Other Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

12 Jun 2, 216 Exhibit 36: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16E FY17E FY18E PBT Depreciation Tax Paid (393) (459) (538) (57) (715) Inc/dec in Net WC (15) 135 (369) 37 (235) Other Income (33) (253) (229) (246) (283) Other non cash items (71) (62) Cash flow from operating activities Inc/dec in capital expenditure (1467) (8) (66) (86) (99) Others 152 (187) (642) (16) (184) Cash flow from investing activities 35 (195) (78) (246) (283) Inc/dec in borrowings 1 Dividend paid (1122) (235) (241) (241) (241) Cash flow from financing activities (1122) (235) (1941) (241) (241) Net change in cash 172 (164) (764) Exhibit 37: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout Ratio (%) Debt/Equity (x)..... RoE (%) RoCE (%) Exhibit 38: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price 12

13 Jun 2, 216 Stock Ratings Absolute Returns Buy : > Hold : 5- Sell : <5% Connect & Discuss More at (Toll Free) research@karvy.com Live Chat f in You Tube Disclaimer Analyst certification: The following analyst(s), Jagannadham Thunuguntla, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer: Karvy Stock Broking Limited [KSBL] is a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. KSBL has filed an application with SEBI, seeking registration as a Research Analyst and such application is pending for disposal. 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