Bajaj Corporation Ltd Key Data (as on 20th February,2013)- Date-20 th February,2013 Current P/E- 21.9 Recommendation-BUY Current P/B- 7.79 Current price-226 Dividend Yield- 2.8% Target-290(1yr) and 550(2-3 yrs) ISIN- INE933K01021 Portfolio Allocation:- Start with 7%-9% portfolio allocation in the price range of Rs- 215-230.You can consider to increase allocation up to 15% in case of any price correction. Introduction:-Once Warren Buffet said, "It s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." My new recommendation, Bajaj Corp is one such wonderful company that is available at fair price. Indian hair oil industry is still filled with several unorganized players and unbranded products. Several years ago Marico reaped the benefit of un-organization and became largest player in the coconut hair oil industry. No wonder, its stock also generated multibagger return. Still now, the market is filled with many unbranded products (mainly in rural areas). Urban India is also experiencing a shift from coconut oil to light hair oil. If Bajaj Corp utilise this opportunity, then it will also become a next Marico and thus will generate multibagger return over long term. Bajaj Corp already attains leadership in the light hair oil segment and also increasing its market share at steady pace. It is also quite successful to penetrate new market with new products. So, there is a huge possibility to maintain healthy owth rate with its leadership position in the coming years also and thus generating multibagger return over long term. Bajaj Corp is the second largest company in the Shishir Bajaj Group of companies. The history of Bajaj Corp dates back to 1953 when Mr Kamalnayan Bajaj established Bajaj Sevashram to market and sell hair oils and other beauty products. Today Bajaj Corp manufactures and markets five major brands. The flagship brand of the company is Bajaj Almond Drops(generates more than 90% revenue from this product only).other brands are Bajaj Brahmi Amla, Bajaj Amla Shikakai and Bajaj Jasmine Hair Oil. It also introduced Bajaj Kailash Parbat Cooling Oil to diversify their product portfolio. Bajaj Corp has carved out a niche category of Almond hair oil in the LHO segment and the same has helped the company ow at a much faster pace than the overall market and command a leadership position in the light hair oil segment. www.paulasset.com Page 1
Investment Rationale:- Strong and recession proof owth rate :- Demand of hair oil will not be affected by any kind of economic downturn. People won t stop using hair oil in any kind of recession. Over the last 5 years Bajaj Corp recorded more than 30% annualized owth rate in terms of volume. Still there is a huge scope of rural penetration. Management is also trying to penetrate new market in order to maintain 30%+ owth rate in future also. High Pricing Power without losing market share:- Over the last few years, the company has been steadily increasing the price of its flagship product Bajaj Almond drops hair oil to pass the price hike of raw materials and operating expenses. But the most interesting fact is during that period the product also experienced an annualized owth rate of more than 25% in terms of volume. In spite of price hike its strong brand equity helps it to gain market share also. I think a strong business must have the ability to hike price easily without losing its market share. Despite regular price increases, Bajaj Almond drops has been steadily gaining market share and maintaining its margin. Rural penetration:- Bajaj Almond drops is relatively costly product among its competitors. So, still now it is an urban dominated product. As per the management the company is trying to tap the increase in disposable income of rural India and convert rural consumer from unbranded to branded products. It also made available Bajaj Almond Drops in sachets and other low unit selling price packs to gain market share from rural India. I am quite sure such initiatives will surely help the company to maintain its huge owth rate in the future also. Wide Distribution network:- For any FMCG company advertisement, sales and distribution networks are three major pillars to become successful. A product that is widely and easily available is likely to catch more eyeballs to establish a strong brand in the market. Over the years Bajaj Corp has established a strong distribution network across the country. The company is also trying to increase its distribution network for rapid rural penetration. Debt free:- Bajaj Corp is a debt-free company. The manufacturing facilities didn t require much capital investment. So the management is quiet confident to maintain 25%+ operating profit margin and strong owth without raising any external debt. Huge free cash flow:- The company generates huge cash flow from operation year after year. Its working capital requirement is also negative. I believe that the company will also produce huge cash flow from operation in the coming years also which is very positive sign. High Dividend Payout and healthy ratios:- Bajaj Corp is consistently reporting healthy ROE and ROCE, which argues well for highly efficient management. Moreover it maintains very high dividend payout which is an indication of shareholder friendly management. www.paulasset.com Page 2
Latest Product Bajaj Kailash Parbat Cooling hair oil :- Bajaj Corp is promoting agessively its latest product Bajaj Kailash Parbat Cooling Oil to build a diverse product portfolio. Cooling oil is one of the fastest owing segments in the Indian hair oil industry. Emami s Himani Navratna Cooling Oil is the market leader in the cooling oil segment with more than 50% market share. Thus it may face stiff competition, however the product has performed relatively well till now. I expect strong volume owth from this product in the upcoming March and June quarter. Investment Concerns:- Bajaj Corp generates more than 90% of its revenue from the sales of Bajaj Almond hair oil. So, it is largely dependent on a single product to maintain huge owth. After a certain market share it won t possible for the company to expand its market share. However to remove this over dependency the company is promoting agessively its new product Bajaj Kailash Parbat Cooling hair oil. Till now the company is able to pass any kind of raw material price hike to the customer by increasing the price of the product. After a certain point it is really doubtful whether the company can do so or not. Financial Performance (Yearly) Mar,2012 Mar,2011 Total Sales 473.31 359.44 owth 31.68% Net profit 120.09 84.1 owth 42.79% Earning per share 8.14 5.7 EPS Y-OY Growth 42.81% Book Value 29.01 BV owth Debt/Equity ratio 0 0 Operating profit margin 24.64 30.12 Net profit Margin 23.67 22.62 Dividend Payout ratio 57.1 38.85 ROE(%) 28.06 22.35 ROCE(%) 34.58 31.58 Cash flow from operation 89.84 101.46 profit/cash 1.34 0.83 www.paulasset.com Page 3
Financial Performance (Quarterly) Dec,12 Sep,12 Jun,2012 Mar,2012 Dec,2011 Total Sales 148.28 31.80% 136.01 26.99% 138.24 29.58% 147.04 33.54% 112.5 30.57% Net profit 42.2 46.12% 38.4 33.57% 37.62 32.37% 34.05 26.63% 28.88 48.87% EPS 2.86 45.92% 2.6 33.33% 2.55 32.40% 2.31 26.78% 1.96 48.94% Net profit margin 28.46% 28.23% 27.21% 23.16% 25.67% Overall Performance Rating Matrix Sales Growth:- Bajaj Corp is reporting very strong sales owth quarter after quarter. Management is also confident to maintain that owth rate in future also by increasing market share of its existing products.thus rating is assigned as 9 out of 10. Profit Growth:- The company also maintains its profitability while expanding market share. I am expecting more than 25% CAGR owth rate over next 3 years. So the rating assigned is 10. Debt To equity ratio:- Bajaj Corp is a debt free company which also generates huge cash year after year to fund its operating expenses. So, the rating in this parameter is 10 out of 10. Return On equity(roe):- Return on equity reveals how much income a company generates with the money that equity shareholders have invested. Thus it indicates how efficiently the management uses its shareholder s capital. ROE of eater than 15% is considered as decent while eater that 20% is considered as good. The company s last year ROE stands at 28.06. So I assign 10 out of 10. Return On Capital Employed (ROCE):- ROCE indicates the profitability and efficiency of a company s total capital investment. Thus ROCE should be higher than the cost of borrowing. ROCE of eater than 20% considered as good. Average ROCE of Bajaj Corp is more than 30%. so the rating is 10. Valuation:-Bajaj Corp is traded at P/E of around 22 and P/B of around 7.8, which is considered as very high but justified as a high owth FMCG company. So the rating assigned is 5. www.paulasset.com Page 4
Bajaj Corp 20 th February,2013 Promoter Shareholding:- Promoter share holding reflects the confidence of the promoter in their company. Promoter share holding more than 40% provides a safety for retail investors. Its promoter shareholding stands at 84.75%. I am also waiting to see how they can reduce the promoter holding as per SEBI norms. Thus I assign 9. Promoter Share Pledging:- Pledging of a company s share adds extra risk to its share market price. Promoter pledging of eater than 20% signs a red flag. It can lead to a sudden fall in its stock price. At the end of December,2012 quarter there was no pledging by promoters. So,the rating assigned is 10. Dividend Payout Ratio:- Consistent and high dividend payment is an indication of share holder friendliness of a company s management. The company maintains a very healthy dividend payout ratio. At current market price dividend yield is around 2.8. So,the rating assigned is 9. Total Rating:- Based on above all parameters total average rating stands at 9.1 out of 10,which makes Bajaj Corp an excellent stock to invest for long term. Parameters Marks out of 10 (Higher marks indicates better performance) Sales owth- 9 Profit owth- 10 Debt to equity ratio- 10 Return on equity(roe)- 10 Return on capital employed(roce)- 10 Valuation (P/E ratio and P/B ratio)- 5 Promoter share holding- 9 Promoter share pledging- 10 Dividend payout ratio- 9 TOTAL 82 TOTAL(AVERAGE) 9.1 ** Rating is based on the company s performance for last 5 years and expected performance for next 4-5 years. Rating is on scale of 1 to 10. 1 indicates worst performance and 10 for best performance. www.paulasset.com Page 5
Valuation and Conclusion:- At current market price Bajaj Corp is traded at P.E of around 22 and P.B of around 7.8. Yes the valuation seems to be very high if you look at the standalone figure. But if you look at its peers then you will get a clear picture. At the time of preparing this report Industry P.E stands at around 40. Entire FMCG sector is demanding very high valuation. Moreover its key competitor Marico is traded at P.E of around 35 and P.B of around 12. So, I can say that the relative valuation is still low and the stock demands re-rating in future also. Any kind of P.E expansion along with strong owth can generate multibagger return from this price level also. We know that the company is debt free and generating huge cash year after year. The business model is also excellent, backed by very strong brands with pricing power. More over it is consistently reporting around 30% owth rate. Even the management is confident to maintain that owth in coming years also. All this indicates that we can find a future multibagger in this stock. Start buying with 7-9% portfolio allocation in the price range of Rs-215-230. Add more at any dips. With an average P.E (22) and with 30% owth rate over next year one can expect minimum 25% price appreciation in one year (target-290, for 1 year). The stock is also a defensive one so it can protect your portfolio at any kind of market downturn. More over if the company maintains its profitability along with expanding market share in the next 2-3 years (high probability of the same) then one can reasonably expect more than 100% return within 2-3 years. www.paulasset.com Page 6