Bajaj Corp Limited

Buy Bajaj Corp with Target of 550.

Ends FY2015 on a strong note; we expect a stronger FY2016E; 

BAJAJ CORP reported a strong set of numbers for 4QFY15 – revenues, EBITDA and PAT grew 28%, 40% and 32%, respectively. The company enters FY2016E with robust volume momentum and favorable RM tailwinds – a combination that should drive strong EBITDA and EPS growth. We reiterate our BUY rating on the stock with a revised target price of `540 (from `510), valuing the stock at 24X FY2017E EPS.

Strong volume momentum sustained partly aided by low base; ADHO volumes up 23.9% yoy

Bajaj Corp (BJCOR) delivered another strong quarter – revenues were `2.35 bn (up 28% yoy; KIE: `2.42 bn), EBITDA was `734 mn (up 40% yoy; KIE: `762 mn) and recurring PAT came in at `662 mn (up 32% yoy; KIE: `684 mn). Marginal miss in our estimates was primarily due to a 3% miss in revenues on account of lower realization growth (up 3% yoy versus our estimate of ~5% growth on account of higher sachet sales). NOMARKS revenues for the quarter were `166 mn, up 58% yoy and 22% qoq – in line with our estimate. Overall volume growth (including NOMARKS) stood at 23% yoy. BJCOR’s recently launched low-cost Amla offering, Bajaj Amla, reported `14 mn revenues (two months of sales) – we note Bajaj Amla is competitively priced at `20 for 80 ml SKU similar to Shanti Amla (recently reduced prices from `23 for 80 ml SKU to `20, perhaps in response to Bajaj Amla launch). 

Margins inch up to multi-quarter high aided by lower LLP prices

EBITDA margin expanded 270 bps yoy to a multi-quarter high of 31.2%, in line with our estimates, largely driven by 370 bps expansion in GMs and 50 bps yoy dip in staff costs. GM expansion was led by lower LLP prices – declined 17% qoq/21% yoy to `62.4/kg. BJCOR invested part of the GM gains into higher A&SP – up 190 bps yoy; however, it has cut A&SP qoq by 220 bps from historical high levels of 19.6% in 3QFY15 to 17.4% in 4QFY15 (as percent of sales) as incremental investments in advertising have become suboptimal, as per the management. 

We remain positive; retain BUY rating and raise TP to `540 (from `510)

We model 28.9% yoy growth in PAT in FY2016E aided by – (1) 18% yoy growth in ADHO revenues (14% volume growth and ~4% weighted-average realization growth) and (2) 240 bps jump in GMs to 64% aided by 20% dip in LLP prices; we note BJCOR has locked in LLP for 1QFY16. While we expect A&SP to jump 70 bps yoy to 18.3%, we expect the bulk of increase to be driven by higher promotional expenses (especially at consumer levels in form of freebies). 

We remain bullish on BJCOR driven by 

• Robust volume momentum
• Strong earnings growth visibility 
• Modest valuations (P/E of 21X FY2017E EPS; at ~40% discount to sector multiples ex-ITC);  retain BUY rating with revised target price of `540 (from `510) based on P/E multiple of 24X (~30% discount to sector multiples ex-ITC)

Management highlighted – 

• Strong volume growth in 4QFY15 was partially aided by low base and higher promotional spends, 
• Rural growth continues to outpace urban growth by 9.6% points; urban off-take declined 5.7% in 4QFY15 in volume terms for the LHO category, as per Nielsen, and 
• Overall category volume growth remains weak as per Nielsen – overall hair oil volumes declined 6.1% and LHO volumes declined 2.3% for 11MFY15. However, the management did indicate that secondary volume growth remains healthy at 13%. 

GMs to improve led by lower LLP prices and price hike. 

LLP prices (key input; constitutes ~35-40% of raw material costs) have corrected further from 3QFY15 consumption average of `75/kg to `62.4/kg (4QFY15 average); this can act as a key margin tailwind in the near term. We note BJCOR has locked in its LLP requirements for 1QFY16 at current levels. The management also highlighted that it has taken a weighted average price hike of ~5% effective April 2015 in ADHO. 

Part of GM gains to get reinvested in higher A&SP; more ‘P’. 

The management guided that it will continue to reinvest part of GM gains into higher A&SP, especially higher promotional spends as incremental investment in advertising would yield suboptimal results; however, it will not discount (run price-offs) the core ADHO brand and would run promotional offers in form of freebies (e.g. it is currently offering toothpaste free with 500 ml SKU of ADHO and NOMARKS soap free with 300 ml SKU). The management indicated that A&SP (as % of sales) will remain in the range of 17-18%.

Update on NOMARKS. 

NOMARKS continues to register good growth and registered revenues of `582 mn in FY2015 led by better traction in both creams and facewash. The management highlighted that NOMARKS has become the largest-selling antiseptic cream after two years with 17% market share and is now the second-largest anti-blemish facewash with 6% market share. While creams portfolio registered 27% yoy growth in off-take, facewash registered a solid 58% yoy growth in off-take during 11MFY15, as per Nielsen. 

Update on international business. 

The international business contributed 3% to total revenues in FY2015 and registered 55% yoy growth. BJCOR is planning to increase its focus in international markets like Nepal, Bangladesh, UAE and Africa; we note BJCOR has four dedicated country managers across key geographies and is planning to set up a manufacturing (third-party) facility in the UAE. 

Other takeaways. 

• Tax rate to remain at MAT level in FY2016E and will inch up marginally in FY2017E as benefits expire; however, BJCOR will get offset due to MAT credits accumulated, and  
• Sachet accounted for 20% of sales in 4QFY15 and registered a growth of 32% yoy. 

Particulars	2015	2014	2013	2012	2011
Revenue	821.29	671.73	606.72	473.32	359.44
Other Income	31.55	40.13	40.05	37.38	17.02
Total Income	852.84	711.85	646.77	510.69	376.46
Expenditure	-629.20	-513.67	-433.85	-356.68	-269.47
Interest	-0.10	-5.88	-0.08	-0.08	-0.11
PBDT	223.54	192.30	212.84	153.94	106.88
Depreciation	-4.24	-3.68	-3.28	-2.60	-1.79
PBT	219.31	188.63	209.55	151.34	105.08
Tax	-45.99	-38.18	-42.17	-31.25	-20.98
Net Profit	173.31	150.44	167.38	120.09	84.10
Equity	14.75	14.75	14.75	14.75	14.75
EPS	11.75	10.20	11.35	8.14	30.20
CEPS	-	10.45	11.57	8.32	29.12
OPM%	27.23	29.50	35.09	32.54	29.76
NPM%	21.10	22.40	27.59	25.37	23.40