Hold Bajaj Corp; target of Rs 209: Ventura

Ventura has recommended hold rating on Bajaj Corp (BCL) with a target of Rs 209 in its October 8, 2012 research report. The research firm expects BCL’s revenues to grow at a CAGR of 24% to Rs 727.8 crore over the forecast period of FY13-14.

“BCL reported a robust top-line growth of 27.2% YoY to Rs 135.9 crore in Q2FY13 as against Rs 106.8 crore in Q2FY12 which was in-line with our estimates. The top-line growth was primarily led by volume growth of ~18.9% YoY from its flagship brand (Almond drops) and increased distribution reach (2.43 mn retail outlets vs. 2.35 mn in Q1FY13). The company reported net profit at Rs 38.4 crore in Q2FY13 as against Rs 28.7 crore in Q2FY12 (+33.6% YoY) partially attributable to the price hike (~8.5%) taken in April 2012.   EBITDA margin at 28.7% for the quarter, expanded by 310 bps YoY on account of price hike taken in April, 2012 and decline in RM costs (LLP – Rs 81.4/kg; ~ -5.0% YoY) partially offset by rising refined oil prices (Rs 84.9/kg; +25.8% YoY). Moreover, BCL has entered into a deal with its LLP supplier (its key raw material; ~38% of total cost) which will enable it to buy LLP at an average price of Rs 78.5/kg in Q3FY13 and at Rs 73/kg in Q4FY13. This, we believe will help BCL to maintain its EBITDA margin in the range of ~26-27% in FY13 amidst volatile raw material prices.”

“BCL witnessed a healthy volume growth (18.7% YoY) and value growth (27.3% YoY) which was far ahead from the LHO market growth (volume - ~15% YoY and value - ~25.4% YoY). The volume and value market share enjoyed by Almond drops continue to command leadership status i.e. ~51.8% and ~54.4% respectively. Moreover, we believe that Dabur’s foray into LHO category (launch of Dabur Almond Hair Oil) is likely to  encourage healthy competition which will eventually lead to expansion in the LHO market size. BCL being the leader in this category is best placed to benefit from this.   BCL’s Kailash Parbat (cooling hair oil segment) brand posted a decent volume growth of 68.5% YoY and has increased its volume market share from ~ 2.1% in Q1FY13 to 2.9% in Q2FY13 (target – 6%). Also, the brand has added ~0.8 lakh retail outlets during the quarter to 3.8 lakh retail outlets. Going ahead, we believe that this distribution network leverage is likely to augment revenues from the brand as it establishes its hold in the segment.”

During the quarter, Bajaj Corp Ltd (BCL) continued to post a robust volume growth of 18.9% in its flagship brand ADHO (Almond Drops Hair Oil). Aided by steady volume growth (~20% avg.) and sustained leadership position in its flagship brand Almond Drops, we expect revenues to grow at a CAGR of 24% to Rs 727.8 crore over the forecast period of FY13-14. Moreover, BCL has entered into a deal with its LLP supplier (its key raw material; ~38% of total cost) which will enable it to buy LLP at an average price of Rs 78.5/kg in Q3FY13 and at Rs 73/kg in Q4FY13. This, we believe will help BCL reduce volatility in its EBITDA margin. At a CMP of Rs 187, Bajaj Corp is trading at 18.0x and 15.2x its estimated earnings for FY13 and FY14 and we reiterate a HOLD with the revised price target of Rs 209 (as against our revised target of Rs 169) representing a limited potential upside of ~11.7%. Prospective inorganic growth coupled with strong cash availability (~Rs 440 crore) and better visibility from its current business over the next two to three years is an added attraction,” says Ventura research report.

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