Tuesday, August 17, 2010

A fast-growing company at attractive price (Bajaj corp)

With its flagship brand Almond Drops, Bajaj Corp is the largest producer of light hair oils in the country — a category in which it has consistently been gaining market share. Besides Almond Drops, the company manufactures and markets other hair oil brands like Bajaj Brahmi Amla, Bajaj Amla Shikakai and Bajaj Jasmine Hair Oil.
Bajaj intends to leverage the success of its Almond Drops brand by launching four products in the personal-care segment, which will help drive growth and diversify the product range. Further, the company also seeks to consolidate its position in the FMCG segment by continuously evaluating inorganic acquisition opportunities.
The company intends to deploy about 90 per cent of the IPO proceeds to finance the launch of new products (Rs 220 crore), along with acquisitions and strategic initiatives (Rs 50 crore).
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*on Pre-IPO equity capitalSource: RHP
Light hair oils gaining shareWith a market share of a little over 50 per cent (in value terms), Bajaj Corp holds the lion’s share in the light hair oil segment. These oils are positioned as premium products in the hair oil market and enjoy high margins, which reflect in Bajaj Corp’s numbers as well. Interestingly, the segment’s overall sales – both in terms of value (28 per cent) and volume (18 per cent) – grew at a faster rate, compared to the overall hair market in the last five years.
The swifter growth in the light hair oil segment is driven by up-trading from coconut and heavier hair oils, higher urbanisation and increase in disposable incomes in rural markets. Moreover, the company has been consistently gaining market share.
The share of Almond Drops, which contributed over 90 per cent to Bajaj’s sales and profits, rose from 31.4 per cent in 2005-06 to 50.3 per cent in 2009-10.
OutlookAround 68 per cent of sales in the light hair oil segment came from urban markets – at least that was the case earlier. However, of late, rural markets are observing greater traction on account of a rise in disposable incomes and introduction of smaller store-keeping units (SKUs), which help improve penetration. In addition, conversion of consumers to branded hair oil products from unbranded ones will help companies like Bajaj Corp to churn higher growth rates.
For Bajaj Corp, its sales and net profits grew at 35 per cent and 79 per cent, respectively, in 2009-10 compared to the previous year. Since Bajaj Corp was carved out in April 2008, the financials for the company are available only from 2008-09.
With the commissioning of a new facility at Ponta Sahib in March, which has resulted in more than doubling of capacity to 74 million litres, requirements on the capex front is likely to be very limited in the medium-term. As a zero-debt company and with healthy cashflows, Bajaj Corp is, thus, well placed to expand organically as well as inorganically.
While Bajaj Corp also has a presence in the tooth powder segment (black tooth powder), its contribution is insignificant currently. The rising competition in the hair care segment as well as launch of new products would entail higher advertisement and promotion costs that could impact margins.
The reliance on a single product (Almond Drops) for sales and profits is among key risks that the company faces till the time it is able to successfully diversify its revenue-mix.
With raw material costs constituting around 40 per cent of sales, volatility in input prices could impact margins and is another key factor to monitor.
Overall, given the company’s track record and business prospects, expect the company to record healthy growth. Notably, valuations, too, look reasonably attractive. At the upper price band and based on the post-issue equity capital, Bajaj Corp’s IPO is priced at 23.2 times its 2009-10 earnings, which is at a discount to peers like Dabur and Marico, and can be subscried.Buy this for targets of 900.

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