Buy Bajaj Corp; target of Rs 475: JM Financial

JM Financial's research report on Bajaj Corp

Bajaj Corp reported another weak result with a double-digit decline in operating profit for the second consecutive quarter. However, its flagship Bajaj Almond Drops’ (BAD) volume trajectory recovered posting a growth of 6.5% relative to 4-7% decline seen over past 3 quarters– a key positive. The quarter’s volume growth was marginally ahead of retail offtakes (+5%) - this, to us, indicates that recovery is led by underlying demand and not merely re-stocking; sales realisation, though, fell 2% which, as per our workings, is attributable to higher tax incidence under GST (details below). Weakness on earnings side was surprisingly led by higher A&P and Staff costs while the expansion in GPM was aided by tax credits now available on inputs. The company continued to grow its market share and outperform the LHO category growth.

Outlook

We expect volume growth to recover to double-digit level in the latter half of FY18, aided in part by a favourable comparator – this should aid stock performance especially given a steep 45%+ discount to the sector’s 12M forward multiple (ex-ITC).