Anubhav Sahu Moneycontrol research
Bajaj Corp, leading manufacturer in the light hair oil segment (61 percent of market share), was the first in the FMCG pack to report its September quarter earnings. As always, it brings to light early trends in the sector and, now more importantly, further updates on the GST transition. Unlike the much talked-about ‘V’-shaped restocking and a scenario of supply chain normalization by Q3, the industry appears to be grappling with a slightly longer transition.
Q2 2018: Weak margins though a probable refund would partially offset
Bajaj Corp’s quarterly sales rose 3.8 percent driven by a 5.1 percent domestic volume growth (vs -7.8 percent in Q1 2018). International business sales was down 15.4 percent on account of continuing weak macroeconomic conditions in the Middle East and North Africa region. Domestic business witnessed a restocking-led growth but was still way behind expectations due to ongoing GST-led transition effect.
EBITDA margins dropped by 556 bps year-on-year on higher employee cost (9.5 percent of sales vs 7.5 percent in Q2 2017), higher sales promotion cost and other expenses. Light liquid paraffin (LLP), a key raw material, as well firmed up by 16 percent YoY. However, in case of further price escalation, management guided for minimal impact in near-term as the company has an inventory till December.
The company expects a refund of about Rs 6.4 crore as the manufacturing units under the tax free zones would continue to enjoy fiscal benefits as per recent announcement from government. This would improve the EBITDA margin to about 32.45 percent for Q2 2018.
Almond Drops Hair Oil: Volume uptick
Bajaj Corp’s key brand Almond Drops Hair Oil witnessed a volume uptick after three consecutive quarters of de-growth. The company’s market share in the light hair oil category has sustained around 58.3 percent, but company’s share in the total hair oil category is marginally slipping to 7.1 percent when compared to 7.2 percent in June 2018 and 7.4 percent in FY16. Thus, a subtle shift from light hair oil category to other hair oil category seems underway though recent supply chain issues are clouding clear inference.
Distribution pain to linger
The company mentioned that most of the distributors are registered in the GST network but they are finding it onerous to follow up for returns. Key hurdle is the wholesale platform wherein about 1/3rd of wholesalers have not yet started purchasing under the new regime. So the key issue for the company is supply-chain hassles.
As sales growth is 7.4 percent and the end consumer offtake is 4.8 percent, so in balance there has been some restocking. Interestingly, a bulk of this restocking happened in July and has not continued since.
Clearly, a section of supply chain participants are in a wait-and-watch mode. In light of this, the company is aggressively focusing on enhancing direct distribution channel.
CSD (Canteen Stores Department) channel facing structural decline
CSD channel (~4 percent of sales) continue to face de-growth. After 46 percent YoY decline in sales in Q1 2018, CSD channel witnessed de-growth of 21 percent in Q2. Even for stores where inventory level is minimal, orders have been slashed which indicates a structural change. In our earlier interaction with FMCG companies, it was pointed out that going forward CSD sales contribution would diminish as government wants to plug the sales spillover to mainstream market.
Inorganic growth market share targets
Management reiterated that they are still looking at inorganic growth opportunity but didn’t provide any further details to it. It is noteworthy that the company has a shareholders’ approval for raising Rs 1000 crore.
Inexpensive valuation but for a reason
Stock trades at an inexpensive multiple of 27.4x trailing earnings and a near-term rerating is possible if company pursues a credible inorganic route. Having said that company’s ongoing business lacks growth momentum.
Further, in light of supply chain disruptions, we are not enthused about the volume uptick and would wait for sustained traction to acknowledge any turnaround. Wholesale channel and GST-related disruptions, weak offtake in rural areas and the lower share in total hair oil market make us cautious on the stock.
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