Buy Bajaj Corp; target of Rs 228: Nirmal Bang

Nirmal Bang is bullish on Bajaj Corp and has recommended buy rating on the stock with a target of Rs 228 in its October 9, 2012 research report.

“We have upgraded our FY13E and FY14E earnings estimates for Bajaj Corp (BCL) by 6.4% and 3.7%, respectively, factoring in higher gross margins. Consequently, we have increased our target price on the stock to Rs228 (from Rs220 earlier) and retained Buy rating on it.”

“BCL’s gross margin in 2QFY13 expanded 208bps QoQ and 393bps YoY on account of a fall in LLP (liquid light paraffin) prices by 5% YoY, a key raw material (38.5% of total costs). Further, BCL had gone for an 8% price hike in April 2012, thereby aiding expansion in margins. We believe the recent rupee appreciation along with crude oil prices cooling off will result in strong gross margins in the coming quarters. Consequently, we have factored in higher OPM estimates of 26.6% and 26.3% for FY13E and FY14E as against our previous estimates of 24.6% and 25.1%, respectively. BCL reported strong volume growth of 19% YoY in its leading brand Almond Drops, largely driven by rising urbanisation and structural shift of consumers’ preference from coconut oil and unbranded hair oils to branded light hair oils (LHOs). The management has indicated that rural markets continue to outperform with a 26% YoY volume growth in 2QFY13 as against a 13% YoY growth in urban markets.”

“The management, which has given capex guidance of Rs200mn for FY13E, plans to buy land in Baroda in order to avail the benefits as and when the Goods and Services Tax (GST) is implemented by the government. BCL enjoys fiscal benefits in respect of excise duty and income tax for its manufacturing plant in Himachal Pradesh. The excise duty benefit can be availed until 2020, while the income tax benefit expires in FY15. The effective tax rate will be 27% (currently paying minimum alternate tax of 20.6%) from FY15 onwards, as 50% of the profits continue to remain tax-free until 2020. However, the management has stated that in case GST is implemented before 2015, the effective tax rate will be below 27% as the company will be entitled for tax abatement.”

“At the current market price (CMP), BCL trades at 15x P/E based on FY14E earnings, which is at a 40% discount to peers despite better performance expected (24% earnings CAGR versus 17% CAGR of the fast moving consumer goods universe likely over FY12-FY14E). Dividend yield stood at 2.5%, higher than peers at the CMP, assuming similar dividend payout for FY13E. Further, improvement in RoCE/RoE by 424bps/250bps to 30.8%/30.6%, respectively, over FY12- 14E calls for expansion of valuation multiple, in our view. While BCL’s single-product concentration warrants a discounted valuation, we feel the current discount to peers is too steep. Therefore, we assign a TP of Rs228 i.e.18.3x (30% discount to peers) on FY14E EPS of Rs12.5,” says Nirmal Bang research report.

Public holding more than 90% in Indian cos

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