CMP Rs.207 Target Rs.256 Initiating Coverage - BUY

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1 February 25, 2014 Bajaj Corp Limited. Nurturing Growth CMP Rs.207 Target Rs.256 Initiating Coverage - BUY Key Share Data Face Value (Rs) 1 Equity Capital (Rs.Mn) M.Cap (Rs.Mn) wk High/Low (Rs) 287/198 Avg Daily Vol (in Qty) BSE Code NSE Code BAJAJCORP Reuters Code BACO.BO Bloomberg Code BJCOR:IN Share Holding Pattern (as on Dec 31, 2013) Source: BSE Promoters 75% Others 10.05% DII 2.8% FII 12.87% (Rs.Mn) Key Financials FY12 FY13 FY14E FY15E FY16E Net Sales 4,733 6,067 6,720 7,758 9,213 growth (%) 28.2% 10.8% 15.5% 18.8% EBITDA 1,165 1,726 1,856 2,198 2,667 margin (%) 24.6% 28.4% 27.6% 28.3% 29.0% PAT 1,201 1,662 1,507 1,701 2,099 margin (%) 25.4% 27.4% 22.4% 21.9% 22.8% EPS (Rs) BVPS (Rs) Key Ratios FY12 FY13 FY14E FY15E FY16E P/E (x) P/BV (x) M.Cap/Sales (x) EV/EBITDA (x) ROACE (%) 34.6% 43.4% 40.4% 41.7% 44.2% ROANW (%) 29.9% 36.5% 29.0% 28.5% 30.4% ROAA (%) 29.8% 36.4% 28.9% 28.4% 30.3% D/E (x) Source: Company, SKP Research Price Performance Bajaj Corp vs. BSE % 5% 0% 5% 10% 15% 20% Bajaj Corp BSE 500 Analyst: Mamta Singh Tel: ; Mob: mamta.singh@skpmoneywise.com Company Profile Bajaj Corp Ltd. (BCL) is the second largest company in the Shishir Bajaj Group. The company came out with an IPO in August 2010, is a leading FMCG company into Personal Care segment offering products under the Hair Care & Skin Care category. The company is currently headed by Mr. Kushagra Bajaj, Chairman and Mr. Sumit Malhotra, Managing Director. BCL primarily operates in Hair Oil segment manufacturing and marketing five major brands while recently entering Skin Care segment. Investment Rationale Consistent increase in market share signifies the strength of brand and customer loyalty: The Bajaj Almond Drops Hair Oil (BADHO) brand continues to remain the market leader in the light hair oil (LHO) category. The market share of BADHO has reached an all time high of approx 58% (value terms) in the LHO segment during 9MFY14. Going forward, BCL is aiming to achieve 65% market share in the LHO category by FY BADHO is the key product of BCL catering to premium class accounting for majority of company s revenue and has been growing at a CAGR of 28.46% in terms of value terms in past three years. As per IMRB Report 2013, BADHO is consumed by approx 25mn households or approx 125mn individuals on yearly basis. Strategic moves to tap wide opportunities in rural market: BCL is enhancing focus on rural population to tap wide opportunities available in rural areas. Leading players of consumer products have a strong distribution network in rural India as Rural FMCG market size is expected to touch USD100 billion by BCL s had initiated van distribution operation in CY13 with an objective of increasing Rural Sales, rural consumer being the key to the growth of LHO segment. Vans cover 6481 uncovered Towns and Villages on a monthly basis and has helped BCL s main branch grow at 20.1% by volume in the rural areas. Topline to grow at a CAGR of 14% between FY13 16E with stable EBITDA margins: BCL s volume growth momentum has moderated due to less conversion from non brand to brand and current economic situation. We expect an incremental volume growth in the coming years on back of strong brand, wide distribution network and leadership position. Going forward we expect BCL to report ~14% CAGR value growth between FY13 16E with EBITDAM of ~28% for FY15E & FY16E. Outlook & Recommendation: BCL is well poised to achieve good revenue growth through premium product portfolio and focus on investing in the distribution network of Rural India. Going forward, BCL is aiming to achieve approx 65% market share in the LHO category by FY We recommend BUY rating on the stock with the 18 month target price of Rs.256 per share, implying an upside of ~24% from the CMP of Rs.207. We have arrived at the target by assigning to FY16E P/E methodology of 18x. SKP Securities Ltd Page 1 of 10

2 The Industry: Overview The Indian FMCG sector, valued at Rs. 2,180bn, according to the Nielsen Retail Audit Report, is an important contributor to the country s GDP. Personal Care segment contributes approx 22% to FMCG. The FMCG market is expected to increase approx 14.7% CAGR from USD 36.3bn in 2013 to USD 110.4bn in 2020E due to favorable demographics, rise in income level, rise in rural consumption, etc. (approx 15.2% CAGR from ). In 2011, Indian Rural FMCG market size was approx USD 12bn contributing approx 33% to the total FMCG sector and is expected to increase approx USD 100bn in 2025E due to government initiatives for rural development and increasing distribution network. The Indian Hair care market generated approx Rs. 159bn of the total in Shampoo and hair oils continue to be the key components of this segment and have significantly high penetration in both urban and rural areas. Perfumed oil (cooling oils, light oils, and heavy amla oils) and coconut oil comprises the main segments of hair oil market, while others account for minimal share in the market. The slowdown in hair oil industry is seen across all segments. The overall slowdown in the hair oil industry is caused by the reduction in conversion of unbranded hair oil users into branded hair oil. Hair Care Industry Size & Structure in India LHO & ADHO Market in India FMCG LHO Value ADHO Value LHO Volume ADHO Volume 14,000 35,000 Rs.2,180,640 mn (USD 36.3 bn) 29,663 12,000 30,000 Hair Care 26,768 7% Rs.1,59,340 mn (USD 2.66 bn) salience 10,000 23,368 22,406 25,000 Shampoo Perfumed Oil Coconut Based Oil Hair Conditioners Hair Dyes 18,390 19,908 8,000 20,000 Rs.49,100 mn Rs.47,010 mn Rs.34,040 mn Rs.3,980 mn Rs.25,210 mn 15,603 16,157 13,895 (USD 818 mn) (USD 783 mn) (USD 567 mn) (USD 66 mn) (USD 420 mn) 6,000 13,410 15,000 11,764 11,006 (30.8%)* (29.5%)* (21.3%)* (2.5%)* (15.8%)* 9,559 Hair Oil Market 4,000 8,108 10,000 5,988 3,978 Coconut based Amla based Light Hair Oils Cooling Oils Others 2,000 5,000 Oils (42%)** Oils (17%)** (18%)** (11%)** (12%)** Perfumed Hair Oil Segment FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14 * Value based share of Hair Care Market ** Value based share of Hair Oil Market Source: AC Nielsen Retail Audit Report (Only branded products data for CY2013), Company Presentation & SKP Research SKP Securities Ltd. Page 2 of 10 (Rs. Mn) 3,356 1,230 The Light Hair Oil (LHO) category is the largest and fastest growing non coconut hair oil segment in India. LHO is an urban dominated segment due to its relatively higher pricing where approx 65% revenue is generated from the overall Indian LHO market. Moreover the sales of LHO segment tend to be concentrated in the Northern (50%) parts of India but Western (28%) is also the fastest growing region. Due to the dominance of urban market units like 100 ml (34.2%), 200 ml (18.3%) account for bulk of the sales. However, smaller units 50 ml (17.3%), 2 5 ml (9.2%) are also growing faster in rural markets and continue to be the focus area for LHO. The LHO segment witnessed approx 25.3% CAGR (value terms) and approx 16.7% CAGR (volume terms) over the period of 6 years from FY07 being the second biggest segment in hair oils category. The Almond Drops Hair Oil (ADHO) is the brand that is driving LHO and in turn the overall market. The segment witnessed approx 34.8% CAGR (value terms) and approx 26.3% CAGR (volume terms) over the period of 6 years FY07. The Skin Care market is at a very nascent stage in India with basic requirements of the consumers. Most of the product categories are niche segments. While the awareness rate is high in both urban areas accounting for 60% and rural areas accounting for 30%, the penetration level is low for both. Indian Skin Care segment, valued at Rs. 85bn grew by 12.1% with per capita consumption of approx Rs.18 (USD 0.3) during CY2012 having high potential and the growth rates are expected to be higher at 24 25% over the 4,720 1,910 6,100 2,840 7,100 3,600 8,310 4,410 10,800 5,940 12,990 7,390 10,740 6,310 (In KLtr)

3 next five years. Anti Marks category accounts for Rs. 34.2bn and is growing 27% annually. Anti Marks category broadly includes Face Wash (Rs. 21.4bn), Creams (Rs. 12.3bn) & Others (Rs. 0.05bn) that are distributed through 0.85mn outlets growing by 32%. Company: Snapshot Bajaj Corp Ltd. (BCL) is the second largest company in the Shishir Bajaj Group. The company came out with an IPO in August 2010, is a leading FMCG company into Personal Care segment offering products under the Hair Care & Skin Care category. The company is currently headed Mr. Kushagra Bajaj, Chairman and Mr. Sumit Malhotra, Managing Director. BCL primarily operates in Hair Oil segment manufacturing and marketing five major brands while recently entering Skin Care segment. The premium brand of BCL, Bajaj Almond Drops Hair Oil (BADHO), is the market leader in the Indian LHO segment with approx 58% market share. In addition, the company markets hair oil under the brand names Bajaj Brahmi Amla Hair Oil (BAHO), Bajaj Amla Shikakai Hair Oil (ASHO), Bajaj Jasmine Hair Oil (JHO) and also its unique cooling hair oil product Bajaj Kailash Parbat Thanda Tel (KPCO). It also markets oral care products under the brand name Bajaj Kala Dant Manjan. Bajaj Consumer Care Ltd. (BCCL) has licensed these brands exclusively to BCL for a term of 99 years from March 2008 through a Trademark License Agreement. The consideration to BCCL for the use of these trademarks is in the form of an annual royalty payment at the rate of 1% of Net Sales. BCL has three company operated facilities that falls under tax free zone, located in Parwanoo & PaontaSahib, Himachal Pradesh and Dehradun, Uttarakhand manufacturing all variants of hair oils. In addition, the company is also engaged into third party manufacturers at Parwanoo, Himachal Pradesh also in tax free zone produces hair oils and in Udaipur, Rajasthan producing oral care products. The manufacturing facilities since 2010 are exempted from paying excise duty for 10 years and 5 year full exemption from Income tax and following 5 years to be taxed at a concessional rate. BCL exports its products to many countries including UAE, Mauritius, Malaysia, Kuwait, Maldives, Oman, Kenya, Saudi Arabia, Uganda, Singapore, Myanmar, Pacific Islands (New Zealand, Australia, Fiji Islands) West Indies, Sri Lanka, Bangladesh, Afghanistan, Cambodia, Nepal and USA. The company also has three wholly owned subsidiaries namely Bajaj Bangladesh Ltd., Bajaj Corp International (FZE) and Uptown Properties and Leasing Private Ltd. Bajaj Bangladesh will seek to establish a market for the hair oil products and other related businesses of the company in Bangladesh but revenue contribution during this financial year will be under review due to disturbed political scenario. The UAE subsidiary in Sharjah Airport International Free Zone Authority will start functioning from FY15 to cater geographies of North Africa, Gulf, Afghanistan and Pakistan. The goods will be sold through a warehouse and the company will look at manufacturing only if it succeeds. BCL has acquired and re launched brand new product Bajaj Nomarks in third quarter of current financial year across India. Currently Nomarks is present in 0.27mn outlets pan India with new attractive packaging unveiled for all SKUs (Stock Keeping Unit). SKP Securities Ltd Page 3 of 10

4 Investment Rationale: Consistent increase in market share signifies the strength of brand and customer loyalty: The source of business for LHO segment continues to be people upgrading from basic hair oils like Coconut oil and conversion from unbranded hair oils. Despite the slowdown, BCL continues to focus on distribution of its brands, giving positive results. This clearly demonstrates that consumers are looking at value added oils and are willing to pay a premium for good products. The key contributors to BCL s growth have been Low Unit Price (LUP) packs & new packs that contribute approx 16% to the sales and growing at around 44%. BCL has approx 95% share of LUP packs which account for 9% of total LHO sales. This illustrates BCL s strategy of providing affordable price points to new consumers through LUP packs while providing value for money packs to loyal consumers. The Bajaj Almond Drops Hair Oil (BADHO) brand continues to remain the market leader in the LHO category. The market share of BADHO has reached an all time high of approx 58% (value terms) in the LHO segment during 9MFY14. Going forward, BCL is aiming to achieve 65% market share in the LHO category by FY BADHO is the key product of BCL catering to premium class accounting for majority of company s revenue and has been growing at a CAGR of 28.46% in terms of value terms in past three years. As per IMRB Report 2013, BADHO is consumed by approx 25mn households or approx 125mn individuals on yearly basis. BADHO has created a unique position in the hair oil market through various initiatives such as product differentiation (almond based), focused marketing & distribution and unique packaging (glass bottle to increase shelf life). The brand has showcased a consistent increase in the market share growing from 31.6% in FY06 to 56.9% in FY13 which depicts strong customer loyalty and brand recognition. The brand is urban centric due to its premium pricing compared to the other hair oils. However, it has a good recognition in the rural market. Revenue contribution for 9MFY14 Market Share of BADHO Comparative pricing power BAHO, 1.2 % KPCO, 1.4% NOMARKS, 1.2% ADHO, 95.5 % BTP, 0.3% JHO, 0.3% ASHO, 0.1 % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Value Volume 53.0% 55.0% 56.9% 50.7% 47.4% 41.6% 36.7% 48.0% 49.1% 50.9% 52.6% 31.4% 44.6% 39.6% 33.8% 28.7% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY ml Price Mar 03 Dec 03 Sep 04 Jun 05 Mar 06 Dec 06 Sep 07 Jun 08 Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec Source: Company, AC Nielsen Retail Audit Report Dec 2013 & SKP Research The rural penetration of BADHO is improving on the back of LUP. The brand contributed approx 95.5% to the total turnover of the company in the third quarter of FY14 & has approx 60% market share in rural India with volume growth of approx 11.7%. Rural market contributes approx 39% of the revenue of BADHO brand. SKP Securities Ltd Page 4 of 10

5 Strategic moves to tap wide opportunities in rural market: Leading players of consumer products have a strong distribution network in rural India as Rural FMCG market size is expected to touch USD100 billion by BCL is enhancing focus on rural population to tap wide opportunities available in rural areas. With rising affordability coupled with enhanced information & increasing distribution network, the rural population is witnessing increased awareness of branded products, enabling them to switch from unbranded products. BCL intends to increase contribution from the rural consumers by providing an appropriate value product at affordable price range. BCL have been focused on increasing the reach of its brands in the smallest of markets. The company now reaches 6889 stocks points through direct distribution network of stockists and super stockists. Apart from these, there are another 15,122 wholesalers who stock and sell the brands to retailers. BCL s main brand BADHO is now available in 2.6mn retail outlets to close to 7,000 distributors. In CY13, the brand has entered into 0.37mn additional outlets across India. Stock Points Trend Urban Rural Distribution Trend 8000 Stock Points Distribution (Lakh Outlets) Urban Rural FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 BCL s had initiated van distribution operation in CY13 with an objective of increasing Rural Sales, rural consumer being the key to the growth of LHO segment. The Van Distribution Operation piloted 39 Vans in Q4 FY 13 and currently operating 91 vans (for Sales) and 6 Video Vans (for Promotions). Vans cover 6481 uncovered Towns and Villages on a monthly basis and has helped BCL s main branch grow at 20.1% by volume in the rural areas. The huge increase in the rural distribution network on an annual basis signifies aggressive attempts to penetrate rural areas by the company, in turn will boost the revenues. BCL entering Skin Care Segment with Acquisition of Nomarks: BCL has started execution of newly acquired brand Bajaj Nomarks in third quarter of current financial year across India. The acquisition is a strategic move to enhance BCL s presence in the personal care market and gives it an entry into the skin care category. Nomarks will continue to be be produced for one year under the transition support agreement at manufacturing facility of Ozone Ayurvedics (Acquiree) and will be sold in approx 18 SKUs. The re launch of Nomarks should provide some respite to overall moderation in revenue growth momentum. The advertisement spent (starting from FY15) should help Bajaj Nomarks to gain market share in coming future. We forecast revenue of approx Rs.122mn, Rs.349mn and Rs.506mn for Nomarks in FY14E, FY15E & FY16E respectively. SKP Securities Ltd Page 5 of 10

6 Competitive Scenario: The key players in the Indian Hair Care industry are Dabur, Bajaj Corp, HUL, Marico, Emami and Keo Karpin. Marico being the coconut based hair oil producer leads the overall hair oil market. Marico holds almost half of the market share followed by Dabur & Bajaj Corp. The coconut based oil market is dominated by Marico, the Amla based oil market is led by Dabur, Emami is the market leader in the cooling hair oil & Bajaj Corp heads the light hair oil market. Accordingly, the penetration in the hair oil market is very high and very competitive in the similar products among the competitors. BCL has adopted an aggressive pricing policy and yet has grown its market share and volumes with strong distribution system clearly indicating the brand power. Among its key competitors, BADHO is the only brand which is available in sachets a marketing initiative to penetrate the rural market. Comparative Price of Different Brands for 100 ml in the Hair Oil Segment 70 Bajaj Corp Competitor Brands MRP of 100ml (Rs.) Peer Comparison Particulars Net Sales % growth EBITDA EBITDAM PAT PATM P/E(TTM) CMP Bajaj Corp % % % 18.95x Dabur India % % % 34.15x Marico % % % 26.93x (Rs.Mn for 9MFY14) The above table represents healthy financial figures of BCL compared to its peers. The margins of BCL have outperformed in 9MFY14 than the other two bigger players reporting an EBITDAM of 27.48% and 23% PATM for 9MFY14. Dabur India & Marico both are trading at a higher P/E (TTM basis) of 34.15x & 26.93x compared to lower P/E (TTM basis) of 18.95x of BCL which is usual in FMCG sector. Key concerns: Revenue contribution from BADHO is highly significant (95.5% for 9MFY14) and represents substantially all of BCL s operating profit. Any drop in the sales of Almond Drops or any factor adversely affecting this brand will negatively affect the market share, business and financial performance of BCL. Although, BCL is aggressively looking for expansion (inorganic like Nomarks) of its product portfolio to decrease its dependence on revenue from BADHO in coming future. Key Raw & Packing Material Sensitivity: Vegetable Oil, Light Liquid Paraffin (LLP) & Glass Bottles are the key raw materials of BCL. The current rate of LLP is hovering around Rs.86/kg (linked to crude oil prices). Vegetable Oil is currently steady at Rs.76/kg. Any shortfall in the supply of key raw materials or an increase in raw material costs, may adversely impact the pricing and supply of BCL s products. SKP Securities Ltd Page 6 of 10

7 Financial Outlook: Topline to grow at a CAGR of 14% between FY13 16E with stable EBITDA margins: BCL s volume growth momentum has moderated due to less conversion from non brand to brand and current economic situation. We expect incremental volume growth in the coming years on back of strong brand, wide distribution network and leadership position in high growth almond light hair oil segment also with the introduction of its new brand Nomarks. Going forward we expect BCL to report approx 14% CAGR growth between FY13 16E. EBITDAM to remain stable at approx 28% for FY15E and FY16E. Currently the company is receiving the benefits of exemption from excise duty and income tax due to facilities in tax free zone. With these benefits the PATM will report approx 22% for FY15E and FY16E, a minor margin contraction from current levels due to amortization of recent Nomarks brand acquisition. BCL continues to be a debt free company along with being a consistent dividend payer. On account of moderate growth in revenue, strong brand recognition and expanded product portfolio together will lead the company to sustain its healthy return ratios during FY14 16E. Revenue & Revenue Growth EBITDA & EBITDAM Revenue (In Mn) FY11 FY12 FY13 FY14E FY15E FY16E Revenue Growth 35% 30% 25% 20% 15% 10% 5% 0% Growth (%) EBITDA (In Mn) FY11 FY12 FY13 FY14E FY15E FY16E EBITDA EBITDAM (%) 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% EBITDAM (%) Net Profit & NPM Return Ratio Net Profit (In Mn) FY11 FY12 FY13 FY14E FY15E FY16E Net Profit NPM (%) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% NPM (%) 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% FY11 FY12 FY13 FY14E FY15E FY16E ROACE (%) ROANW (%) SKP Securities Ltd Page 7 of 10

8 Valuations: BCL is well poised to achieve good revenue growth through premium product portfolio and focus on investing in the distribution network of Rural India. In addition, management is also targeting unbranded players market share. Going forward, BCL is aiming to achieve approx 65% market share in the LHO category by FY One year forward P/E Band 300 Price 12.00x 15.00x 18.00x 20.00x 23.00x Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 We recommend BUY rating on the stock with the 18 month target price of Rs.256 per share, implying an upside of ~24% from the CMP of Rs.207. We have arrived at the target by assigning to FY16E P/E methodology of 18x. SKP Securities Ltd Page 8 of 10

9 Financial Performance: (consolidated) Income Statement (March Ending) (Rs.Mn) Balance Sheet (March Ending) (Rs.Mn) Particulars FY12 FY13 FY14E FY15E FY16E Particulars FY12 FY13 FY14E FY15E FY16E Net Sales (Revenue) Equity Capital Operating Expenditure Reserves EBITDA Networth Dep & Am Deferred Tax Liabilities (Net) EBIT Loan Funds Interest Sources of Funds EBT Goodwill Other Income Gross Block PBT Before Excep items Less: Depreciation Amortization of NoMarks (286.00) (469.80) (469.80) Net Tangible Assets Tax Intangible Assets PAT Capital WIP EPS (Rs.) Current Assets BV (Rs.) Current Investments Cash and Bank Balance Ratio Analysis Total Current Assets Particulars FY12 FY13 FY14E FY15E FY16E Total Current Liabilities Earning Ratio (%) Uses of Funds EBITDAM 24.62% 28.44% 27.62% 28.33% 28.95% NPM 25.37% 27.38% 22.42% 21.93% 22.78% Cash Flow Statement (Rs.Mn) ROACE 34.62% 43.42% 40.41% 41.67% 44.22% Particulars FY12 FY13 FY14E FY15E FY16E ROANW 29.86% 36.50% 29.01% 28.47% 30.41% PBT ROAA 29.82% 36.40% 28.93% 28.40% 30.34% Dep & Am Valuation Ratio (x) Interest Expense P/E Other (Inc)/Dec (373.80) (400.50) (416.65) (465.51) (500.27) P/BV (Inc)/Dec in WC (638.50) (174.73) (145.75) EV/EBITDA Taxes Paid (311.40) (423.90) (400.54) (452.23) (557.98) EV/Sales Operating Cash Flows Balance Sheet Ratio Capital Expenditure (195.70) (441.30) ( ) (50.00) (50.00) D/E (Inc)/Dec in Investment ( ) ( ) Current Ratio Other Income FA Turnover Ratio Investing Cash Flows ( ) (584.49) (699.73) Inventory Days Interest Paid (0.80) (0.80) (42.51) (0.80) (0.80) Debtors Days Dividend Paid incl Tax (685.60) ( ) (771.71) (871.30) ( ) Creditors Days Other Adjustments (420.20) 5.20 (0.10) DuPont Analysis Financing Cash Flows ( ) ( ) (814.32) (872.10) ( ) PAT/ PBT Chg in Cash & Cash Equ. (538.80) (576.38) PBT/ EBIT Opening Cash Balance EBIT/ Net Sales Closing Cash Balance Net Sales/ Total Assets Total Assets/ Equity ROE (%) 28.06% 34.43% 27.10% 26.62% 28.31% SKP Securities Ltd Page 9 of 10

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