Bajaj Corp’s Q1 result: GST impacts volume offtake; fund-raising next key event

Anubhav SahuMoneycontrol research

Bajaj Corporation, a leading manufacturer in the light hair oil segment (61 percent of market share), reported its first quarter results on Wednesday. Its conference call threw up interesting insights into how FMCG, of which Bajaj was the first to announce results this fiscal year, would pan out. While the numbers were unimpressive, its plan to raise Rs 1,000 crore and seek shareholders' approval on July 18 is the key event for investors to look at.

Quarterly Result Snapshot

Third Consecutive Month of Volume Decline

Company reported sales de-growth of -3.6 percent (YoY) in Q1 2018 majorly on account of GST transition related issues and channel destocking. There was a decline observed in both value (-4 percent YoY) and volume (-8 percent) terms for almost all products. This is the third consecutive quarter of volume erosion and a slew of reform measures starting from demonetization to GST had a perceptible impact on the supply chain.

Company’s flagship product Bajaj Almond drop hair oil (93 percent of Q1 2018 sales) witnessed 7 percent volume de-growth. On QoQ basis, volume and value have shrunk but management attributed the fall to channel destocking and reduced offtake in the supply chain ahead of the GST deadline in June. The management underlined improved volume growth of about 6 percent during month of April and May.

The management indicated that at the industry level, volume growth was observed for the Amla category with offtake seen in both urban and rural areas. Management highlights this as improving signs for the hair oil industry and would lead to upgrade to Almond drops hair oil, once a sustained economic recovery happens.

Margins largely impacted by a surge in raw material prices

The company reported a contraction of 385 bps in EBITDA margin (31.51 percent) on account of higher raw material and employee cost partially offset by lower promotion cost. Prices of key raw material, light liquid paraffin (LLP, 9.7 percent of sales) had appreciated in June quarter by 33 percent which majorly weighed on margins. However, going forward, as the crude oil prices are expected to stabilise around USD 50-60/barrel, oil derivatives are not expected to witness huge up-moves. The management didn’t provide an explicit guidance but hinted at maintaining current EBITDA margin.

Inventory restocking to gradually pick up

Inventories at the distributor and retail level have reduced to 5 and 7 days, respectively. Usually inventory remains at 30 days and 45 days, respectively. The company is hopeful that the inventory level at distributor’s level would normalise by the end of current quarter though at retailers end it would take some more time as the GST registration progresses.

Long term drivers – dominant position in the light hair oil segment

Hair oil industry is estimated to be worth Rs 10,000 crore which also includes Rs 3,300 crore of coconut hair oil segment. The market size of light hair oil segment is about Rs 1700 crore (17 percent of the hair oil market) and has been growing at a CAGR of 13.2 percent (FY10-17). Sub segment of Almonds drops hair oil (60 percent of light hair oil) has witnessed growth in a higher trajectory of 17 percent CAGR during same period.

Last quarter, despite facing volume de-growth, Bajaj Corp has been able to sustain its market share of 61 percent (broadly the same range since FY15) while maintaining its pricing power. A comparative price of its 100 ml Almond drops is 33 percent higher than the nearest competitor Keo Karpin (Dey’s medical). The company is confident of maintaining its pricing discipline and market share, going forward. Other close competitors are Marico, Emami and Dabur India.

Pursuit for inorganic growth

The company has repeatedly mentioned that it is open to the inorganic route to grow. In this context it is worth noting that Bajaj Corp is seeking shareholders’ approval on 18th July for raising Rs 1000 crore from the market.

Valuation and price performance

In last two years, Bajaj Corp has been one of the laggards in terms of performance. Stock declined by 16 percent compared to 35 percent rise in BSE FMCG index.

Price performance

In terms of valuation, the company is trading at an attractive multiple of 31x trailing earnings (Peer average: 51) and EV/EBITDA of 20x (Peer average: 29) which caps the downside in the light of superior margins and return ratios.

We acknowledge the adverse transition impact on the company’s supply chain on account of government’s reforms and the likelihood of increasing competitive intensity. However, we also think that the company’s openness to inorganic route and emphasis on product diversification can position it for another growth leg.

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