Improving outlook, low valuation drive Bajaj Consumer Care rally

Reduction in promoter pledge holding as well as interest from large HNIs in the stock have only added to the optimism

Shares of hair and skin care products maker Bajaj Consumer Care have risen over 26 per cent since the end of January on the back of improved growth visibility and inexpensive valuation. Reduction in promoter pledge holding, as well as interest from large high networth individuals (HNIs) have added to the optimism.

The December 2020 quarter (Q3) results of Bajaj Consumer, which sells hair oils (Bajaj Almond Drops, Bajaj Amla, Bajaj Brahmi Amla among others) and skin care products (Bajaj Nomarks), surpassed the Street’s expectation on all parameters.

Revenue rose to Rs 247 crore in Q3, up 17 per cent over the year-ago period, led by a multi-year high volume growth of 18 per cent. Domestic volumes were supported by strong rural growth, which saw the contribution of the hinterland to its overall revenues increase from 44 per cent to 50 per cent.

Despite higher input costs and unfavourable product mix (higher share of Amla hair oil), the company’s operating profit margins remained steady at 25.5 per cent, aided by cost optimisation. This helped net profit rise 16 per cent year-on-year (YoY) to Rs 58 crore, versus Rs 50 crore a year ago.

“We are witnessing the focus of the company shift to volume-led profitable growth,” said Parin Tanna, research analyst at B&K Securities. “We expect revenues to grow at a 12 per cent CAGR (compound annual growth rate) over FY21-23 on the back of increased distribution, especially in rural markets, new launches, region-wise product/SKU-based strat­egy and enhanced marketing initiatives,” added Tanna.

Concerns over promoter pledge holding have been an overhang on the company’s stock price in recent years. However, the promoters have brought down the pledged holding to zero and have also highlighted their intention to increase their stake in the firm.

Moreover, there is comfort on the valuation front too. Available at around 14.5-15 times its FY23 estimated earnings, the stock is reasonably priced, given the improving growth trajectory and concerns on pledge are over, say experts.

Last month, Temasek’s subsidiary Baytree sold its entire 6.6 per cent stake in the company. Several HNIs were among the buyers, according to the company.

Long-term investors with some risk appetite can buy the stock, which was up 6.5 per cent this week. Analysts say there is still room for a sizeable upside from the current levels of Rs 264.10.