Bajaj Corp: Improvement in rural demand is key

Inexpensive valuations capture the slow rural growth even as urban demand improves in Sep quarter

Weak revenue growth outlined Bajaj Corp's results for the September quarter (Q2). Flat volumes (down 0.1 per cent year-on-year) and continued slowdown in rural markets (about 43 per cent of revenues) affected revenue in the quarter. The entire revenue growth of 3.5 per cent (to Rs 196 crore) in Q2 was pricing-led as the company discontinued promotions to the trade channels in its flagship brand, Bajaj Almond Drops hair oil. Bajaj Almond Drops volume growth of 1.6 per cent was similar to that of light hair oils market (1.7 per cent), but lagged Street estimate of five per cent by a mile. As a result, the company's revenue missed consensus Bloomberg estimate of Rs 208 crore.

But, there are positives as well, one being the improvement in urban demand. Also, the company witnessed healthy expansion in its gross margins due to falling prices of its key input Light Liquid Paraffin. Though it invested most of these gains in advertising and brand building, Ebitda margin inched up 12 basis points year-on-year to 34.3 per cent. (Ebitda is earnings before interest, taxes, depreciation, and amortisation.) This, coupled with a sharp jump in other income to Rs 15 crore aided Bajaj Corp's net profit in Q2. This metric grew 24 per cent year-on-year to Rs 58 crore and was ahead of Bloomberg consensus estimate of Rs 57 crore.

The other big positive is that the road ahead seems improving, with the management highlighting that green shoots of urban growth recovery are visible. While urban growth is improving, rural growth could also pick up as incomes rise on the back of a good monsoon, higher pay for government employees, and is thus likely to be another focus area.

At current levels, Bajaj Corp stock trades at 24 times FY17 estimated profit, which is cheaper compared to peers such as Marico (40 times FY17 estimated profit). "We see favourable risk-reward on the stock, given Bajaj Almond Drop's medium-term double-digit volume growth potential and the stock's near-40 per cent discount to the consumer sector (excluding ITC)," says Richard Liu of JM Financial.

Bajaj Corp's high dependence on a single product, Bajaj Almonds Drop, which forms 80-90 per cent of revenues, merits some valuation discount versus peers but a 40 per cent gap seems on the higher side, believe analysts. Most analysts polled by Bloomberg have a buy rating on the stock and their average target price of Rs 471 indicates upside of 17 per cent. Rising competition from the likes of Patanjali, continued weakness in the Nomarks brand and the trend of down-trading remain key concerns.