Agree that there is no margin of safety in Page Industry. It also fails on most of the value investing parameters. But, it has several things going for it. The company has been growing at a rate of 35+% for more than a decade now. Still, there is a huge opportunity out there and market is not saturated. Many national/international competitors came but no one could challenge the leadership of this company. Company is showing superior pricing power and keeps on raising prices without loosing market share. The company produces a product which has an evergreen market, which does not get impacted by recession. In short, there is nothing in near term that can shake this company’s growth. And finally, if a company can grow its profit by 40% for four years consistently, it is a four-bagger without any pe appreciation. So, the real question is can company repeat its performance of last 4 years in the next 4 years and what is the probability of that happening? To a general investor, the probability is quite high and he is ready to take the risk. Of course, if future years turn out to be bad then the losses here could be high.
How you arrived at this Dhwanil ??
Returns for an investor also depends on future PE… which is tough to estimate. What is your PE assumption here?
Not so great numbers this 2Q.
Sales up 16.5% largely volume led growth.
EBDITA up 9.7%— Led by Ad expense & employee cost.
PAT down 6% YoY on account of amortization of No-marks brand & interest expense on debt taken for the acquisition.
No-marks acquisition Analysis
Bajaj paid 140 crs for No-marks acquisition. For sales of about 41 crs from No-marks, that’s 3.4 times Sales multiple.
Bajaj & Zydus (which has a similar product) are selling at 5.5-6 times Sales. So, acquisition is good.
I think, in concall they told that Margins are similar to bajaj corp. & market is growing at 25%. So, no-marks should be value-additive in the long run.
BUT in the short run (next 2 years or so), Bajaj may find it tough to show 25% profit growth as it has shown in the past. Reason is theamortizationcharges & interest costs.
Amortization- FY14= 28.6 crs, FY15= 47 crs, FY16= 47 crs, FY17= 18 crs.
Add about 6 crs interest exp to this due to 60 crs debt.
This may not go well with thebottom-line hungry investor community. We all want 25PE stocks to grow at 25%, which is going to be tough now.
So, this may correct in the short/medium term. Keep a watch.
Though it makes no impact on the Cash Flow #Ammortisation
I think 140 cr. is not the total acquisition price, only the price paid for brand. Total price may include price for fixed asset too. Fixed asset is showing a growth from 46 to 184 cr… Need to investigate that.
No-marks acquisition Analysis
I think you are right. The acquisition cost is 140 cr as clarified in the conf. call.
The revenue contributed by no marks will be visible in bajaj corp’s balance sheet once the acquisition is completed?
Mutual funds have increased their holdings from363,148 to 2474355 shares,
Conf Call Key highlights by Capital Market
As per Nielsen data, light hair oil market continues to grow, but Almond hair oil is now not the fastest growing segment. Low cost Amala hair oil is the fastest growing one. The company has seen downtrading in hair oil segment.
The net sales for Q2 has gone up by 16% to Rs 158.25 crore while net profit declined by 6% to Rs 36.02 crore due to EO expense of Rs 5.11 crore. Volume grew by 15%.
The company’s low cost sachet has done better than bottle one. Sachets form 19% of total almond hair oil sales, up from 13%.
Out of 10 SKUs of Bajaj Almond Drop hair oil, 4 SKUs has not seen any price hike, whose contribution has gone up from 18% - 19% to 23%.
Modern sales grew by 4%. It is growing same at the rate of urban sales growth.
Industrial institutional sales have grown well in Q2, where margin is less.
Wgt. avg. price hike was 1% - 1.5% for the company in Q2. Due to mix changed within the SKUs and sales verticals, wgt. avg. price hike growth was less.
During the quarter, the company reported exceptional item of Rs 5.1 crore which is amortization cost related to NOMARKS acquisition. On the full year basis, the mgmt assigned Rs 28.6 crore as amortization cost related to NOMARKS brand. In next four years (FY14-17), total acquisition cost of Rs 140.9 crore will be amortized
Almond Drops, the company’s flagship brand had a decent quarter with 16% volume growth nearly 2.3X market volume growth for the sub-category and 18% value growth.
During the quarter, average price of LLP decreased to Rs 75.33/Kg from Rs 81.43/Kg in corresponding quarter of previous year. However, LLP price is now up and presently is around Rs 98/Kg. Prices of Refined oil decreased from Rs 84.93/Kg in Q2 FY13 to Rs 70.85/Kg in Q2 FY14 in corresponding quarter of previous year.
The mgmt is not thinking of any price hike as the company still has inventory of low cost LLP. The mgmt expects LLP to come down with appreciation in Rupee and crude oil decline (after improvement in Syria situation. LLP presently is at all time high.
In Q2, ASP, other expenses and employee cost were up. Wages and salary will not rise in coming quarters, Q2 was one off. In ASP and other expenses, most of the expenses were towards sales promotion.
The company highlighted that post Nielsen retail audit panel expansion (by 60%, reflecting better urban/rural picture now), its volume and value market share in light hair oil category (for 5M FY14) stood at 56.8% (up 230 bps from FY13) and 58.3% (up 140 bps from FY13) respectively. It also highlighted that driven by new initiatives in FY13 i.e. van operations â currently operating 121 vans and 26 video vans covering 8,039 towns/villages â Almond Drops Hair Oil now gets 38% sales from rural India, its volume growth in rural India is higher at 20.1% and its market share in rural India stood at 60.4%.
The company’s rural volume grew by 20%.
On NOMARKS, the mgmt said that it will cut its SKUs from 54 to 18, as these 18 SKUs form 80% of sales. NOMARKS product range includes Cream, Face Wash, Face Pack, Scrub Bleach and Soaps. The company will spend 25% of its Gross Margin on ASP. NOMARKS is majorly sold through chemist shops. The mgmt said that NOMARKS will see boost in sales once its sales is pushed in general stores also
The company has taken a debt of Rs 60 crore. The cost of debt is 11.5%. Despite having cash, the mgmt went for raising debt because mgmt feels in current environment it is better to maintain liquidity. This debt has no foreclosure penalty.
The mgmt said that going forward, the company’s growth will come from: 1) Almond Drop hair oil; 2) launching new products, (which will not make profit for 3 â 5 yrs); 3) international business; 4) acquisition.
The mgmt said that once Kailash Parbat hair oil stabilizes, it will launch 1 â 2 new brands.
The mgmt said that it is now more focused on volume growth, as there is no issue with margin. The company’s margin in sachet is same as it has from its bottle packaged hair oil.
How the NOMARKS acquisition works is a thing which needs to be seen… With almond drops it has a dominant leadership position whereas with nomarks there are a huge number of players vying for the piece of pie.
And to add to the woes is the amoritisation… As an accounting practice its good but markets look only at earnings and hence the correction.
I think they are mandated to grow inorganically (including foreign markets), reason being the following:
1). Bringing on boardJimmy Anklesaria. Jimmy is a specialist who was previously with Godrej Consumer which is know for its acquisition spree over the last few years. It is believed that Jimmy was involved in most of these deals.
2). Taking a long term debt of 60 crores to finance NoMarks acquisition in-spite of having enough cash to buy it out with cash down.
3). New product development (Kailash parbhat) is taking a longer gestation period (about 5 years) and a lot more hard work to make it profitable, while acquisition when done correctly can contribute to profits in a quarter or two.
The question now is whether they would be able to imitate Godrej Consumer and have the same success?
As far as the markets are concerned it is a 20-25% grower with no positive events to look forward in the next three years with increased tax rates that is going to come in the future. However the following could be the triggers for re-rating:
1). More acquisitions
2). Price Hike in April 2014
i think the amortisation thing is good and is a sign of good mgmt practice. It will effect the earnings growth for the next 1 year and the PE for next 3 yrs.
I think that the formula PEG < 1 cannot be applied across the board. I feel most of the quality companies like nestle, jul , itc have peg > 1). I feel most of the good quality companies ( good track record, good roe / cash-flow, high dividend yield) trade at PE higher than the growth rate.
Bajaj corp is not in the same league but once it can develop few strong and steady brands, it can be a good steady compounder over the long run. I consider it as a low risk moderate return kind of stock.
Disc - own the stock, views are biased.
the stock has fallen to 200 levels and reasonable valuations for a fmcg company.why cant this company be tomorrows category c company,they are spending on ads and expanding in slow measured steps. Iam buying in a staggered manner.The boss Mr.Sumit Malhotra seems to be confident in taking forward the nomarks cream business,despite intense competition. Bajaj corp would definitely benefit from the increased rural spend and according to the concall the rural share would rise to 45% from the present 38%.The financial metrics all look good.Iam looking at this stock from a five year perspective although in the short term there is going to be pain due to interest and amortization costs.
Are there others buying at this price?
i am buying.
i agree that the valuations are on the lower side , for a fmcg company.
Most of the fmcg companies are trading at 30+ PE, however, they own several good brands and it is unlikely that bajaj corp will get same valuation. but its rice / roe is same, only thing it needs to do is develop some more brands which won’t be easy considering tough competition.
i believe the mgmt is good.
the risk is if the No marks acquisition doesn’t turn up well.
During Q2 concall, management had stated that their stock of low cost paraffin procured in the past was running out and the benefit would end in Nov/Dec. Their recent purchases have been at higher cost. That is the reason they have been maintaining that operating margins of 28% plus was not sustainable, and would reduce to 22-25% levels. This will translate into a corresponding reduction in NPM. So unless they hike prices, their EPS could see further pressure.
These are however short term issues, and over the long term, volume growth of 12-15% coupled with price hike linked to inflation of 7-8% (in line with historical trend) would result in sustainable growth of 20-25% for Almond drops. Additions would come from other brands plus no-marks.
Discl - no position…yet.
i was just looking at the shelf space in a department store,the customer is spoilt for choice in the cosmetics space,there was ponds,lakme,everyuth,garnier himalya and even parachute.The prominent space was occupied by garnier,ponds,lakme.There was small space for ozone and nomarks,which made me think if the intense competition would finish them.However i think bajaj is clear that they want to focus only on a niche segment in the cosmetic segment,that is anti-blemish/anti-mark/face wash.This is a 350 cr market and their competitors are himalya and there are no mnc’s in this category.Regarding LLP,they were of the view that it had reached its peak and would come down.Sumit malhotra was confident based on his 18-19 years experience tracking LLP prices.The vans selling their products especially in rural areas is also an innovative one.They dont want to increase the proportion of sachet with respect to bottles and want people to graduate to bottles.Bajaj almond drops had significant shelf space ,cooling oil was tucked in a corner and i could see few amla bottles.Dabur also bought out a similar product some time back,but looking at the shelf space ,i dont think its doing well.However the fastest growing category in the hair oil segment this year is the cheaper heavy amla oil ,maybe due to the economic conditions.
Thanks for these details.Could you tell us in which city/town you saw this?
commonstocks that was in surat,gujarat.However i read somewhere the “nomarks” stuff is mainly sold through chemists.
Playing devil’s advocate: Brand is a moat only if someone if a consumer will not buy anything else at comparable prices.
Their mainstay is Almond Oil and I feel if any other FMCG major pushes a similar product (like what Dabur is doing now), It will have an impact on the sales and hence will not command high multiples.
Deep, what makes you say Bajaj Almond as a brand does not have sufficient moat? It is not possible to capture market share and maintain growth with a weak brand. I am very much interested to hear your views on this.
Also one should should not be too bothered about Almond drops generating 90%+ revenue. If you look at the other way, having a single product helps them stay focused (example Colgate). However now they have decided to diversify their product portfolio and they have made their intent very clear.