I don’t think it can trade at 7-8 PE (Rs 100-120) with cash on book = 30% of its market cap unless there is a massive crash in market. 12 PE is right buy price for a business that is not growing but also not fading or cyclical.
The Hair oil business of Bajaj Consumer had been fading since 2015-16. If they do not get their act right, it will keep on fading. What PE should it then trade at? 12 PE of today can be 15 PE for next Quarter and 20 PE for Quarter next to next if inflation keeps hurting and business keeps fading…
I am just trying to ask these questions to myself as I see value in its cheap valuations but most of the time in my past experiences, such cases have been value traps…you can quickly make a decent profit but reversal is followed thereafter…so another question I would ask myself is if I am looking it from perspective of mere profit trade or for investing for long term…
1 Like
Correct. It is undervalued and as a company it should not be trading at much lower due to the inherent nature of the business.
However, the risk is that their margins will reduce for the short to medium term due to inflationary issues and they will burn cash on new products without guarantee they will gain market share(and this will affect margins too) and that they could lose market share with their singular product dependancy also.
Without a dividend policy the dividend may drop too(circa 2020). I personally am targetting around rs. 120 since i would then be pretty content with the opportunity cost of investing here at that price since I’d be ok with a lower dividend + I’d get a higher change of a return of atleast 25 percent of things go wrong. It is undervalued and could be a good option at current levels too. This is just based on the valuation i am comfortable with and will let me stomach what could be a tough few quarters/years.
Disc: Tracking only. Not invested yet.
Fading and stagnation is different. The issue of sales growth exists since 2016 where but still company generated same amount of FCF. stock got hammered to 12 PE in 2020 and did not recover like other FMCGs when dividend was cancelled for that year and once dividend was announced in 2021, stock bounced back to 25 PE. The risk of inflation and lack of volume/revenue growth reducing the 5 yr average cash flow has not played out yet though the risk exists since 2016. There are many companies that are considered value traps (including commodity stocks), followed mean reversion in terms of PE(market perception) and fundamentals(company performance) after multiyear under or outperformance.
2 Likes
Thanks, agree to your points. I think most significant here is the intent of the promoters to transform and that is shown by walking the talk and by actions. I see significant gap here. For eg. a decent acquisition was promised during IPO…none happened. I remember at time of recent stake sale to reduce pledging, it came in news that promoters would soon increase their stake again. Not heard about it. New products beyond hair oil was promised, seen none significant in 10 years and even amid major covid disruption…
Although now seeing some premium launches within Hair oils…
Even if this company speaks and eventually does walk the talk then I have seen as per my limited tracking is that it takes significant time to reach where they speak of (unless the strategy is changed in between in few years)… say if a Tata can do in 1 year, Marico can do in 2 years, same result it can do in 10+ or 20 years (Hypothetically)…it may very well walk the talk…but timeframe is a BIG question for me…
I am playing an anti-thesis because off late I am myself getting attracted to its cheap valuations so want to make sure I brood over all doubts…
Disc: As above. Views only for academic purposes and I can be completely wrong in all my assessments
1 Like
The company did do an acquisition for a brand called No Marks for 130 crores, if I’m not wrong. And the management received no marks for the acquisition because it fizzled out within a few quarters. They’ve launched multiple products over the last decade, with no avail.
I’m okay with the company’s current lacklustre performance. The issue is the company’s reluctance to throw cash into newer businesses. The lion’s share of advertising, which is an important part of a consumer business, is probably spent on ADHO. None of the other brands have been as heavily advertised so far.
Even the D2C brands launched a few months ago seem to have received no attention. Other D2C start-ups have burnt cash, and have built strong online and offline presence within 5-6 years. These startups are now comparable to Bajaj in size, and are nearing profitability if public statements are to be believed. But Bajaj on the other hand has seen minute sales in the D2C segment, and doesn’t appear to be marketing aggressively either.
So far, it seems like the promoters are not ready to deploy cash either into new products, or return the money to shareholders.
1 Like
Notes from q4 concall:
- Key RM prices ie Rmo and LLP will be a problem until ukraine issue clears up. Expect margins to be hit for the foreseeable
- Demand has been hit too and should take a few quarters to improve.
- Small steps in digital advertising and e-commerce but atleast it looks like they are finally putting some effort there. Ad spend in digital spend increasing too
- Attempt at premiumisation with their premium adho
Overall, looks like the next year could be a wash so the pain is nowhere close to being done and continues to reflect in the stock price. The good news is that they continue to generate cash and can maintain a dividend of rs. 8 even in these trying times(apart from covid year… which was an outlier due to the inherent nature of the event they’ve still maintained good dividend over the years).
Mr. Nandi seems to be taking the right steps (digital ad campaigns which are surprisingly good, ecommerce, premiumisation, new products) but this may take a while to contribute to the topline while the ukraine war will continue to decimate margins. For me, risk reward long term is slowly becoming favorable ie around 120 is still my target for entry, considering the nature of the business… and the nature of the market currently could lead to this situation playing out.
Disc: not invested.
1 Like
• Another poor quarter from Bajaj Corp – they are finding themselves between a rock and hard place - with high rural salience and in a category like hair oils which has generally more price-sensitive customers. 4Q sales declined 12% YoY with EBITDA/ PAT declining 45/35% YoY. They did worse than the overall category – as per Nielson retail data, the hair oil category declined 5% YoY.
• Note that while the two-year CAGR for 4QFY22 looks better at 10% growth, Bajaj had a 17% QoQ sales drop in Mar-20. A three-year sales CAGR should settle all debate and that is negative 3%. On a full-year basis too this has been quite a forgettable year for them – sales declined 5% YoY with EBITDA/PAT declining 30/25% YoY. Here too, they have underperformed the category. Nielson suggests the category grew by 4% in FY22. Another way is the compare this to Marico’s Parachute and Value-added Hair Oil’s portfolio which grew 11% and 14% respectively in FY22. Bajaj has certainly disappointed this year when a lot of hopes were pinned on Jaideep Nandi turning the ship around.
• EBITDA margins continue to slide – FY22 margin was 20% versus 26% in FY21 and 30% in FY19. However, the 4QFY22 margin was 16%, 400bps below the FY22 margin. I do not see a margin recovery for the next couple of quarters if one were to trust HUL’s commentary. Possible that FY23E is another year of weak (flattish or low single-digit earnings growth).
• The new CEO, Mr. Jaideep Nandi has been around for more than two years now, but his performance has been a mixed bag, and certainly below market expectations. To his defence, COVID did not help. His mandate was to pivot Bajaj into a faster-growing FMCG company with a more diversified product profile, and away from its dependence on Almond Drop Hair Oil. While margins have come off sharply, growth has been inconsistent and below peers.
5 Likes
Yup this quarter was a washout. Expect the next 2 to 3 quarters to be a washout too. Margins may drop even further too. According to the concall margins should start coming back to normal end of FY23. Right now the situation looks like a dumpster fire. However, there are a few positives in the horizon…
- Adho dependancy has gone down to 90 percent from 93. Management expects it to fall down further this year as their new products start contributing more. Think of Adho as the cash cow ie a high margin product that won’t show much growth but won’t disappear into the sunset any time soon either
- Management is trying to diversify their portfolio with new products as mentioned above. They continuously talk about decreasing dependancy on hair oils and moving towards skin care and premiumisation. The next 2 to 3 years will be the investment phase in these new products and post that about 2 of the new 5 products could touch 50 crores each (again according to management in concall)
- Ecommerce has been non existent uptil a few quarters away… still far away from being meaningful but atleast they are now beginning to place their premium products online.
Considering the company has approx 30 percent of market cap as cash in books ie 700+ crores, generates FCF every year from which it pays out dividend, has no debt … the only thing left is for management to actually figure out ways to grow again. Unfortunately the next year or two could continue to be painful since they’ll need to spend on their new peoducts… which could also hit the dividend hard… but there are green shoots slowly becoming visible. Even someone like mr nandi would need more than 2 years to turn this ship around since he himself says thefes no magic bullet when changing their product mix and dependancy on adho and growth Could be 2 to 3 years away. Could be a lot more pain here in the short to medium term but valuations do give some comfort.
Disc: Not invested yet. Opportunity cost here would be too high for me currently. If the company continues to take a beating over the next few quarters i will consider investment at lower levels
1 Like
Bajaj Consumer Care plans to expand its hair oil brand – Almond Drop through the introduction of new products in the space of haircare and skincare, … For instance, the company has rolled out its soap of 100 gms priced at Rs 52…
At the same time, the company has launched a premium range of products under the brand Natyv Soul.
Ratings on bajaj cocunut oil on
- Flipkart - 12.7k
- Amazon - 1.3k
Oldest review on amazon is on 7 April. Though most of the reviews have come after June.
Parachute cocunut oil max rating
Flipkart - 240k
Amazon - 59k
One question, what is the margin on cocunut oil?
I have heard in a youtube video where ceo said that it is a low margin product and they are using it to strengthen their distribution in south.
Disclosure - I have invested in this company recently.
1 Like
Hair oil companies sale many variants of Coconut oil, Aloe Vera Enriched etc … generally every one sell pure coconut oil also. Not sure how sale is distributed among all the variants?
Coconut oil prices keep varying wild time to time. They may have to deal with inventory gain/loss accordingly. For example currently you will find all companies selling coconut hair oil at ~50% discount to MRP, it is because coconut oil price have crashed.
Reading KSE Ltd reports can give you more idea about dynamics of coconut derivatives products.
4 Likes
Just one thing I would like to point. This stock ipo price was 660 and peak was at subscription 800. Since then this stock has been downwards. It has never reached back to those heights. I have burnt my hand for last decade in this company. I am holding it for a decade and this is the only company which is loss making in my portifolio. Please beware, this is a value trap.
1 Like
The stock indeed had 660 as IPO price, but there was a 1:5 split in 2011 0r 2012 so adjusted IPO price would be 132.
4 Likes
Bajaj Consumer share price has started upward trajectory. It was and is still a value buy in FMCG space. If Mr. Nandi can somehow use the brand to create a new successful category like shampoos, conditioner, soap, or skin care, then with a slight uptick in revenue growth it has a huge potential for re-rating.
The management needs to execute fast like Mamaearth and the new-age FMCG brands, take some bold steps and big decisions. You can always buyback shares on Bajaj almond hair oil cash flow But market won’t give the valuation nor it has potential to chart the future course of the company. Need to leverage the strength and brand value of Bajaj and Bajaj Almonds brand.
1 Like
I have noticed that the company is putting effort in optimising operations, atleast since last 2 quarters. In latest quarter
-
Consolidated sales increased by 9.5% YoY, and 14% QoQ.
-
Total market share remains flat at 10.4%
-
Urban demand has improved now positive, rural demand has slight improvement but still negative.
-
Prices of RMO and LLP has reduced significantly and consequently the margin has improved to 17.9%
-
Dividend announced Rs. 5/- per share.
Performance on expected lines, the price was supported by buyback since last Q, hopefully this Q performance will support it further.
Also, in previous quarter there are some more positives.
-
Reduction in consumption of glass bottles by 8%. (above 16% done last year)
-
Reduction in consumption by 6%. (above 14% done last year)
-
Reduced 30% of water consumption compare to H1
And the cumulative results of which shall spurt growth in coming quarters, if company can stick to these improvements.
Disc:
Invested.
4 Likes
Launch of new product by company today.
Hope to see more such products in future, so that reliance on ADHO reduces. The strategy looks clear at the moment.
source : https://www.bseindia.com/xml-data/corpfiling/AttachLive/e10e4404-5d46-49d1-9e23-aaf5ce6d0e57.pdf
3 Likes
Packaging looks neat. It is a great step in the right direction - leveraging Bajaj brand in traditional hair care products.
Also, it is great to see company leveraging the Bajaj brand instead of trying to create new brands like Natyv that are not even pronounceable. Many more such initiatives needed!
2 Likes
Another launch today,
The strategy is playing at nice pace, and its getting reflected slowly in price as well.
Source: https://www.bseindia.com/xml-data/corpfiling/AttachLive/03fc232b-09ef-4d28-822b-ff7319ac7c49.pdf
2 Likes
