Narnolia Securities Ltd. RAJEEV ANAND 15-Jan-18

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1 15-Jan-18 INDUSTRY - Con. Staples Bloomberg Code- BJCOR IN BSE Code NSE Code - BAJAJCORP NIFTY Company Data CMP 508 Target Price 570 Previous Target Price 410 Upside 12% 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) RoE & ROCE % % ROE ROCE 51% 48% 44% 43% Shareholding patterns % 525/343 7,489 Key Highlights of the Report: Bajajcorp has reported better set of numbers for Q3FY18, sales were in line to our expectations while PAT beat our estimates. Financials/Valu FY15 FY16 FY17 FY18E FY19E Net ation Sales EBITDA EBIT QFY18 2QFY18 1QFY18 PAT Promoters EPS (Rs) Public EPS growth (%) 16% 14% 11% -2% 11% Total ROE (%) 3 41% 44% 43% 46% ROCE (%) 48% 5 51% 48% 5 Stock Performance % BV Mn 3Mn 1Yr P/B (X) Absolute P/E (x) Rel.to Nifty RAJEEV ANAND rajeev.anand@narnolia.com 5 46% FY15 FY16 FY17 FY18E FY19E 140 BAJAJCORP NIFTY Segment wise Analysis: Almond Drops Hair Oil's volume for this quarter grew by 4. as against the decline of 4.2% (impacted by demonetization) in Q3FY17. Company reported sales of 197 Cr (vs our expectation of Rs 198 cr), up by 6% YoY. PAT for this quarter remained Rs 55Cr (vs expectation of 51Cr), down by. Pleasant surprise came on the margin front. Gross margin improved by 348 bps YoY led by better products mix and input credit. The company posted overall volume growth of 5.2% while domestic volume growth remained 8.2%. Going forward we expect better volume growth led by rural demand recovery, new product launches and expansion of direct distribution reach by the company. As we get confident on the volume and realisation growth going forward, we raise the target earning multiple to its historic high of 36 times and recommend ACCUMULATE with the target price of Rs 570. Kailash Parvat Cooling Oil s volume declined by 59% YoY while Brahmi Amla Hair Oil (BAHO) has shown a growth of 7. According to management currently Amla Oil is growing much faster pace than light hair oil. Nomarks has shown a growth of 122% in UP market in Q3FY18 led by distribution expansion and brand building.enthused to this, management plans to launch it in other states. The company has re-launched Brahmi Amla Hair oil in this quarter which has essence of Ayurveda. Please refer to the Disclaimers at

2 Quarterly Performance Financials 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY % QoQ% FY16 FY17 YoY % Sales % -3% % Other Op. income % Total Sales % 2% % Other Income % -44% % COGS % Employee Cost % -1% % Other Expenses % -4% % EBITDA % 16% % Depreciation % % Interest % 12% % PBT % Tax % 9% % PAT % % Modern trade shines while International business remained dampener : ADHO has maintained its leadership in light hair oil segment with marketshare of 61.1%. Bajajcorp s sales for this quarter grew by 6% YoY to Rs 197 cr on the back of better domestic volume growth led by its flagship brand Bajaj Almond. The company has accounted for Rs 11 cr as GST Refund for 2nd and 3rd Quarter. Adding together sales becomes Rs 208,up by 11%. Gross margin improved by 348 bps YoY to 69% led by input credits and change in product mix towards high unit packs. EBITDA for this quarter grew by 11% YoY to Rs 68 from Rs 61 cr on account of GST refund coupled with volume & value growth while EBITDA margin declined by 16 bps YoY to 32.6 %. PAT declined by YoY to Rs 55 cr. PAT margin for this quarter remained 26., lower by 442 bps YoY due to decrease in other income from treasury operations and unrealised M2M losses. Almond Drop Hair Oil (ADHO) has maintained its leadership in light hair oil segment with the market share of 61.1% and 58. in value and volume terms. The company posted overall volume growth of 5.2% while domestic volume growth remained 8.2%.Company s International business has de grown by 44% YoY due to sluggishness in MENA as well Nepal business Total Sales(in cr) 3 28% 19% 12% 1% % 1 2% 4% 4% - -2% -3% - -12% Net Sales gr%yoy % 43%43% PAT(in cr) PAT gr%yoy % 24% 19% 17% 17% % -3% % -2

3 Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY(+/-) QoQ(+/-) FY16 FY17 YoY(+/-) Gross Margin 65.6% 67.3% 65.1% % 0.2% EBITDA Margin 32.8% 32.4% 30.7% 28.6% 32.6% -0.2% % 33.1% 1.8% PAT Margin 30.9% 25.7% 27.8% 24.8% % 1.7% 22.4% 27.4% 5. Gross margin improved by 348 bps YoY to 69% led by input credits and change in product mix towards high unit packs. EBITDA for this quarter grew by 11% YoY to Rs 68 from Rs 61 cr on account of GST refund coupled with volume & value growth while EBITDA margin declined by 16 bps YoY to 32.6 %. PAT declined by YoY to Rs 55 cr. PAT margin for this quarter remained 26., lower by 442 bps YoY due to decrease in other income from treasury operations and unrealised M2M losses. Gross margin improved by 348 bps YoY to 69% Gross Margin EBITDA Margin 32% YoY Increase in the price of LLP in Q3FY18. LLP price Gr(%)YOY % 12% -1% -21% -31%-3-27%-26%-26%-24% -1-1% 33% 16% 32% International business went down by 44% YoY due to decline in MENA and Nepal business. Concall Highlights(Q3FY18): BAJAJCORP is planning to become well diversified FMCG Company from a Hair Oil based company. For this, company will launch new product in every quarter and expand its footprint in different categories. If inflation in crude remains at elevated level, company may take price hike in April18. The rural demand is expected to come back in Q1FY19 post the Rabi crop,government initiatives in terms of MSP and other likely announcements in the upcoming Budget. LLP cost is inching up, at current price it is up by 72% while refine mustard oil price declined by 9%. The company stocked heavily LLP in last quarter which will cover till march 18. Company s International business has de grown by 44% YoY due to sluggishness in MENA as well Nepal business. Q3FY18's revenue growth is not comparable as sales value last year had been netted of 14% of VAT, however this year GST rate was 18%. Growth in rural market remained weak. down to 0. in this quarter. For Light Hair Oil(LHO), rural volume growth was Business from Canteen Stores Department (CSD) has declined by 2.7% in this quarter, however better than previous 2 quarters. Now it recovering but timing of full recovery is still to Company s clear. direct reach has gone up as it has added 300 sales representatives. Nomarks has shown a growth of 122% in UP market in Q3FY18 led by distribution expansion and brand building.enthused to this, management plans to launch it in other states.

4 Investment Arguments: Strong Brand Presence and Market Share: BAJAJCORP has strong presence in light hair oil market with its flagship brand Bajaj Almond Drop Hair Oil. It is the market leader in light hair oil with a healthy market share(value wise) of 61%. Last year company s market share had declined by 30 bps but now company has regained it. In a tough environment regaining as well as retaining its market share shows strong brand loyalty. Revival in Hair Oil demand to boost growth: Hair oil market was reeling with demand pressure for last 3 years. We expect hair oil industry to do better going forward and first signs of this are quite visible in Q2FY18 result of Bajajcorp. Volume of its flagship brand, Almond Drops Hair Oil (ADHO) grew by 6% YoY, better than 7 previous quarters. This growth largely came from urban market. We expect rural to join urban growth going ahead considering moderate monsoon in this year and government rural initiatives. The company is increasing its direct distribution reach which will also help company to garner better volume growth going ahead. Strong Balance sheet with reasonable dividend yield: BAJAJCORP has strong balance sheet with no long term borrowing and negligible short term borrowings of Rs 15 cr. The company is maintaining dividend payout above 7 for last 3 years and at present price its dividend yield is approx. 2.4%. Above 2% dividend yield is a handsome cash flow for investors and will give comfort to hold investment for long term. ADHO volume for this quarter grew by 4.(Vs decline of 4.2% in Q3FY17). Market share of ADHO improved by 50 bps YoY. ADHO Volume(in Lakh cases) ADHO Volume Gr(%)YOY ADHO(Value Market Share) % % 58.4% 60.3% % 61.1% 50.7% % FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 YTD Dec 17 View & Valuation Bajajcorp has reported better set of numbers for Q3FY18, sales were in line to our expectations while PAT beat our estimates. Company reported sales of 197 Cr (vs our expectation of Rs 198 cr), up by 6% YoY. PAT for this quarter remained Rs 55Cr (vs expectation of 51Cr), down by. Going forward we expect better volume growth led by rural demand recovery, new product launches and expansion of direct distribution reach by the company. The company is planning to launch one new product in every quarter which will boost company s volume growth going ahead. Erosion in margin may happen due to rise in crude oil price but we believe company s pricing action, sales pick up and better product mix will negate the extent of this. Margin erosion may not be sharper. Going forward, we expect ROE to improve by 326 bps to 46% in FY19E. At the ROE of 46%, company is still cheaply valued as compared to other FMCG companies in our horizon and as we get confident on the volume and realisation growth going forward, we raise the target earning multiple to its historic high of 36 times. We value BAJAJCORP at 36 times of FY19 s EPS and recommend ACCUMULATE with the target price of Rs 570. Risk to our estimates will be sharp rise in the crude oil prices and delay in rural

5 Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Revenue from Operation ROE 41% 44% 43% 46% Change (%) 6% -9% 13% ROCE 5 51% 48% 5 Other Operating Income Asset Turnover EBITDA Debtor Days Change (%) 14% -4% -3% 7% Inventory Days Margin (%) 31% 33% 31% 29% Payable Days Dep & Amortization Interest Coverage 1, EBIT P/E Interest & other finance cost Price / Book Value Other Income EV/EBITDA EBT FCF per Share Exceptional Item (47) (18) - - Dividend Yield % 2.3% 2. Tax Minority Int & P/L share of Ass Assumptions Reported PAT Y/E March FY16 FY17 FY18E FY19E Adjusted PAT ADHO Volume growth 3% -2% 3% 1 Change (%) 11% -1% -9% 11% ADHO Pricing growth 2% -3% 1% 3% Margin(%) 27% 29% 26% 2 Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Share Capital PBT Reserves (inc)/dec in Working Capital (28) 7 10 (1) Networth Non Cash Op Exp Debt Interest Paid (+) Other Non Current Liab Tax Paid (53) (58) (59) (65) Total Capital Employed others (25) (28) - - Net Fixed Assets (incl CWIP) CF from Op. Activities Non Current Investments (inc)/dec in FA & CWIP (17) (36) (7) (7) Other Non Current Assets Free Cashflow Non Current Assets (Pur)/Sale of Investment (86) (53) 19 (30) Inventory others (0) Debtors CF from Inv. Activities 6 (15) 12 (37) Cash & Bank inc/(dec) in NW Other Current Assets inc/(dec) in Debt Current Assets Interest Paid - - (1) (1) Creditors Dividend Paid (inc tax) (204) (204) (210) (221) Provisions others Other Current Liabilities CF from Fin. Activities (194) (200) (211) (222) Curr Liabilities Inc(Dec) in Cash 5 (3) 33 (16) Net Current Assets Add: Opening Balance Total Assets Closing Balance 5 (3) 45 4

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