Slowdown in demand eats into Bajaj Consumer Care's June quarter numbers

Focus on brand building may keep margins under check

Unlike the March 2019 quarter, Bajaj Consumer Care was hit by slowdown in demand, leading to lower-than-estimated numbers in the June 2019 quarter (first quarter, or Q1). 

While the company’s standalone top line grew by 8.1 per cent year-on-year (YoY) to Rs 232.5 crore, its net profit was up 9.1 per cent to Rs 58.7 crore. 

In the last quarter, the company had indicated healthy demand (11 per cent revenue growth in the fourth quarter of 2018-19), which was in contrast to the commentary from other fast-moving consumer goods players.

In Q1, moderation in rural demand led to a slower 4.7 per cent volume growth, with lower offtake of its flagship Almond Drops hair oil. According to the management, Q1 volume growth was driven by low-cost products such as the amla hair oil. Its premium portfolio felt the brunt of consumption slowdown, restricting sales realisation and gross margin benefits. Benign input costs, however, led to 107-basis points (bps) YoY expansion in gross profit margin to 66.7 per cent in Q1. 

Yet, as observed in the case of other consumer staple companies, Bajaj Consumer, too, used advertising and promotional effort to push its products (including the newly launched Bajaj Cool Almond Drops) amid muted demand. 

Its advertising and promotional spending, as a percentage of net operating income, shot up by 217 bps YoY. This, along with higher other operating expenses, led to a 188-bps YoY contraction in earnings before interest, tax, depreciation and amortisation margin to 29.3 per cent.

The advertising and promotional expenses are likely to remain elevated in the near term, as the company aims to focus on brand building in a waning demand environment. This, coupled with consulting charges (hired services of Bain & Company), would keep the operating margin and overall earnings growth of the company under check. 

However, some cost-saving measures like lowering employee base and depots and the full benefits of the 3.8 per cent price hikes in April should limit the margin risk for Bajaj Consumer, says an analyst.

The management also indicated that near-term recovery in consumption demand is difficult to gauge. The stock shed 1 per cent on Tuesday, against 1 per cent rise in the Nifty FMCG index.