Bajaj Consumer Care (Formerly Bajaj corp limited)

Stock Opportunities Not-so-Hidden Gems
61

My two points are:

1). “Brand” are notequivalentto “Moat”. While an user may chose a high visibility brand over an unknown product/service which is similar - The true value of the Brand (IMO, for investment purposes) is when the consumer will not pick anequivalentproduct from a similar (or more) visible brand at even lower price. Examples would be Jockey vs Fruit of the Loom; Heinz vs Kissan etc. If a trusted and known company like Dabur or Marico want to compete in this segment with a decent product quality (which is not difficult to make) I don’t think Bajaj corp will have it easy.

2). Valuations: Bajaj Corp is unlikely to trade at valuations similar to other FMCG companies.

Point I am not trying to make: One vs Multiple product segment - Each has its advantage depending on business strategy/model.

62

Dabur is already competing in the market from past 2+ years without making any dent to Bajaj Almond Drops sale.

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According to this [http://business.outlookindia.com/article_v3.aspx?artid=287811] article, Dabur almond oil now has ~10% market share. Its been just in last 1-2 years that Dabur/marico has started to focus on this category where Bajaj has been for decades. My point simply is that there is strong competition emerging now, and it may not have similar growth as it had before.

I am not invested in any of the above.

1 Like
64

Interestingly the 10% market share of Dabur has not come at the cost of Bajaj. Bajaj continues to hold 50%+ of market share. Until they start loosing the market share to Dabur, there is nothing to worry as they continue to grow at 20+%.

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btw, In absolute sense I think Bajaj corp is a good business. Just that at current valuations and possible competitive uncertainties I think the future returns may not be same as past.

66

The pie is big enough for more than one player. Currently there is a slowdown in volume growth and Sumit Malhotra has mentioned in the conf call that they continue to invest in advertising and promotions. If you compare the SKU prices in this category Bajaj Almond is among the expensive hair oil available in the market and people have been buying it inspite of it. In my opinion they have been doing the right things over the years to strengthen the moat.

While Bajaj Corp appears to be selling sachets and playing the low income market, Dabur seems to be targeting affluent households. Through out October they were running a facebook campaign for Dabur Almond hair oil, while Bajaj Corp doesn’t seem to care about this.

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Presently bajaj corp does have a limited moat - that is reflected in the high roce inspire of high div yield. They have placed the almond drops oil in premium category and they never reduce the price ( though they give offers). Limited amount of pricing power is there.

Also, the distribution network and rural reach is expanding. Future growth is going to come from smaller cities.

However, whether they can protect the “moat” or not - only time will tell.

It is unlikely that their market share will increase much from present level and may drop a little bit.

But the market size is growing and few players can survive at the same time.

Plus there is a possibility of expanding to other countries like Bangladesh also, and they are doing same on a capex light model.

In the medium to long term , they need to increase revenue share from some other brands as well or may be exploit the bajaj almond brand by launching some new product.

The risk of competition eating into the market share will remain valid and has to be monitored.

the roce as mentioned by the mgmt is likely to go down a bit.

the launch of new products may not be successful.

the acquisition of nomarks may not give desired results.

It is not a technology stock which can get obsolete in a short span of time. The fall in market share / profitability is likely to be gradual and will us a chance to exit ( though at a loss).

But there is a decent possibility that in the coming years , nomarks will add up to the top line and bottom-line. So at present PE and ratios and no immediate threat it does look attractive.

1 Like
68

The company is giving 4 Garnier shampoo of Rs 3/- MRP FREE with 100ml bottle now.

Seems that the sales aren’t going well, hence the Free shampoo.

So, I am expecting low volume growth + some margin pressure over next 2-3 quarters.

69

This company had cash from iPo, why it took debt for acquisition.if some body has copy of latest earning concall please post.

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most likely they want to keep some cash for further acquisitions.

71

Key highlights of concall by Capital Mkt;

The mgmt said that branded hair oil market is under stress. It has shown de-growth of 0.1% in volume term and 3% in value term. Light hair oil has shown 5% growth in Q3. The slow-down in hair oil is more than other categories from FMCG because in hair oil, growth mostly comes from conversion from unbranded to branded hair oil, from there to value added hair oil, which is slowing down. This situation is expected to be there for next 1 *C 2 quarters.

The net sales for Q3 has gone up by 7% to Rs 158.21 crore with volume growth of just 1% while net profit declined by 31% to Rs 29.1 crore. The reported net profit includes an amortization charge of Rs 9.4 crore (post-tax) towards NOMARKS, the brand it acquired recently.

The company reported a volume growth of mere 1% with the flagship brand Almond Drops Hail Oil de©)growing by 1.5%. Almond Drops Hail Oil volume declined for the first time ever. However, the offtake at the retail level i.e. the secondary level grew by 12%. The volume of Kailash Parbat was up 41% and Almond Shikakai up by 5%. Brahmi Amla Hair Oil volumes declined by 31%.

Gross margins improved by 180bps and gross profit grew by 10% on account of pricing and decline in LLP prices. During the quarter, average price of LLP decreased to Rs 75.85/Kg from Rs 78.63/Kg in corresponding quarter of previous year. Additional gain on account of decrease in LLP prices in current quarter is Rs 0.79 crore. The average price of Refined oil decreased to Rs 76.16/Kg from Rs 79.71/Kg in corresponding quarter of previous year. The additional gain on account of decrease in Oil prices in current quarter is Rs 0.28 crore.

The price of LLP is currently hovering at Rs 86 per kilogram. The mgmt is expecting a drop in LLP prices in the coming months. Also, the company is covered till the end of February 2014 as far as the low-cost LLP stock is concerned. As such, the mgmt has ruled out any price hike in the near term, but it has hinted at a price hike in April 2014.

Advertisement and Sale Promotion (ASP) rose by 340 bps in Q3. The mgmt said it will continue to investment behind brands even in this slowdown period, whose benefit it will reap once the upturn takes place.

The companyis OPM declined from 29.1% to 27.5% (YoY) mainly due to ASP spend. The mgmt said if OPM decline below 25%, it will take price hike even in this slow down scenario.

The recently acquired NOMARKS brand contributed around Rs 6 crore to the top line. This was from sales of less than 1.5 months without any advertisement spending. The gross profit margin for the NOMARKS business is about 61%. It is the second largest brand in the fast-growing antimark/ anti-blemish category. The brand has more than 12% market share in the Rs 342 crore anti-mark market, which is a very small niche market.

In Q3, Almond Drops Hail Oil derived 39% of its sales from rural India. The rural volume growth was 12%, which is much lower than the above 20% volume growth seen in the corresponding quarter of the last year. The mgmt said that difference between rural and urban growth has become nil.

The company has an extended distribution reach of 2.62 million retail outlets, which are serviced by 6889 direct distributors and 15122 wholesalers. The companyis rural distribution network currently stands at 1.57 million outlets which is about 60% of the companyis overall distribution reach. The van operations (91 vans for sales and 6 video vans for promotion) are covering around 6481 uncovered towns and villages on a monthly basis.

In December 2013, the company incorporated a wholly owned subsidiary in the UAE for trading in skin and hair care products. The operations of this subsidiary would commence from April 2014 and the company would cater to the Gulf Cooperation Council market.

The total cash balance with the company as on 31stDecember 2013 is Rs 408.64 crore.

The existing loan of Rs 100 crore taken for acquisition of the Brand NOMARKS will be repaid without any pre-payment penalty post 22ndFeb 2014 .

The company is not seeing any acquisition for next 12 - 24 months.

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I am trying to understand the distinction between following scenarios:

Case 1: I have 10% allocation in my portfolio to an established diversified FMCG player say a Nestle or an HUL.

Case 2: I have 2% allocation to 5 companies each of which has established a brand for their single product.

Mr. Market seems to favour Case 1. However, I fail to understand why Mr. Market does so. Does market pay for the diversification HUL has achieved, or is there some inherent advantage like profit from 5 established brands being routed to establish the brand of a sixth product. Or each of the 5 companies in Case 2 need to prove their mettle to the market over time?

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Dear Chintan,

I think economy of scale principal works in favor of company withdiversified product portfolio than 5 companies with different product. shipping cost per unit goes down if you have single distribution channel for 5 products than have 5****distribution channel for 5 different products. The point youmentionedseems valid argument as profit gets pooled and it is easier to push new products.

1 Like
74

Dear Kamlesh,

I agree with your argument about economies of scale. This would be applicable for establishing new companies where you are looking to have high OPM. However for established companies, on the one hand it’s good to have high OPM. On the other hand the P/E ratio already takes into consideration the OPM and actually the established distribution channel(fixed cost) could be leveraged for further products(variable cost) to improve OPM for a company having a single product.

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Key highlights by Capital Mkt;

The net sales for Q4 were almost stagnant at Rs 184.18 crore while net profit declined by 22% to Rs 38.31 crore. Volume declined by 6%.

The mgmt said that as per Nielsen, overall hair oils growth continues to witness deceleration across segments with Q4 registering flattish growth. Only light hair oil posted a minor growth of 2%. Branded Hairoil grew just by 3% in FY14.

The difference between rural and urban growth which was 11% plus in Q1 FY14 has now reduced to 4.5% in Q4 FY14. Rural growth now in line with urban growth rates. Light Hair Oil (LHO) as a category witnessed 4.9% growth in rural markets while ADHO registered 6.9% growth in rural and 5.5% growth in urban markets.

The company's primary sales at distributor/retail level are now largely in line with consumer off-take levels. Bajaj Almond Drops Hair Oil (ADHO) registered 8.5% volume growth at secondary off-take level. ADHO pipeline correction may continue for another quarter if growth continues to decelerate from current levels and distributors/retailers realign their stock purchases.

The number of stock days at distributor level has reduced from peak of 40-45 days to 30-32 days by the end of Q4.

The company has taken 5% weighted average price hike in ADHO, effective April 2014 to cover for uptick in input cost inflation.

The company has exhausted its low priced LLP inventory in Q4 FY14 and recent purchases are at ~10-15% higher prices. The LLP price is currently around Rs 87 / kg. The mgmt expects correction in LLP prices and as such it has not got into any procuring contract. The company has negotiated an increase of 5% in glass bottle prices with its suppliers

The mgmt said that cooling oil market is doing badly. Kailash Parbat oil has declined by 6% in Q4 due to multiple price hike and delay in summer. The mgmt expects breakeven for Kailash Parbat this year.

Amla Shikakai which was launched 5 yrs ago, was not able to sustain its margin. As a result, the company has never pushed the product in market. Now, competitor and the company's product have same price, which has resulted in sales rise of Amla Shikakai

3.5% of business comes from out of India.Bangladesh in Q4 has shown 12% decline in volume.NOMARKs under erstwhile promoters had registered revenues of Rs 27 crore in FY13 and during H1FY14 it has registered revenues of Rs 16 crore. The company has rationalized NOMARKs SKUs from initial 54 to 19. It will sell only focus 11 SKUs in rural market. It has unveiled a range of offerings under 5 key segments â creams, face wash, soaps, scrubs and face packs. The distribution has been ramped up to 300,000 outlets from initial 150,000 outlets and the medium-term target is to reach 600,000 outlets. The company has sorted out manufacturing/logistical issues and is now manufacturing from 3 locations â Guwahati (original plant), Uttarakhand (third party) and Himachal Pradesh (third party). The product is now available in urban and semi-urban/rural areas and the company has also unveiled a new TV advertising campaign.The mgmt said that it has concern about decline in monsoon, which can impact its business badly in coming months.Tax rate to be around 21% - 22% for FY15 and FY16

76

Despite being a cash rich and debt free company — bajaj corp is going ahead and raising 1000 cr from share issuances… it is a definitely a questionable move… if they are planning for a big acquisition — expect further decrease in the EPS due to amortization and also share dilution!!! Anyone has looked into it?

77

I used to hold this co, but got out because I was not comfortable with their drive to raise cash in spite of adequate cash reserves. They first came out with a public issue specifically to fund acquisitions. But, when they did acquire “No Marks”, they decided to fund it with debt even though there was adequate cash earning FD like returns in the co. Now they are planning to raise Rs.1,000 crores even as there iscash and cash equivalents of Rs.300 crore on their books and no major capex plan in near future. The presence of cash hungry Bajaj Hindustan in the promoter group’s co will surely give rise to suspicions about cash transfers within group cos. Though, to be fair, the management has categorically stated in concalls that there will be no fund diversion.

Another negative is the current market cap of Rs.3,400 crores, when the cos own presentation to investors estimates the total market size for their products (perfumed hair oils) at Rs.4,700 crores and total hair oil at Rs.8,100 crores. This leaves very little scope for growth.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bajaj_Corp_Ltd_280414_rst2.pdf

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Hi Balaji ,

from where do you know that Bajaj corp is going to raise 1000 cr.

79

Hi Manish

Its Item No. 10 in their AGM Notice scheduled for 01-Aug-2014.

http://www.bseindia.com/bseplus/AnnualReport/533229/5332290314.pdf

80

thanks Ajit,

they have asked powers to the board to raise upto 1000 cr through any means deem fit by the company. That does not mean they will raise 1000 cr. If I am not wrong most of the time companies set limits much more their needs to avoid going to the shareholders again for approval in case required.

However, most likely the company might be aiming for some bigger acquisition otherwise there was no rationale for such resolution.

Disc : invested . will wait and watch.