 "Bajaj Corp valuations rich despite weak show")
Bajaj Corp’s December quarter results missed Street's expectations on all fronts. Weak volume growth of about three per cent on a year-on-year basis was the lowest in seven quarters. This is because its flagship brand, Bajaj Almond Drops Hair Oil (ADHO), reported a muted one per cent volume growth in the quarter. Softness in rural demand (40 per cent of ADHO sales) along with the Chennai floods were the key reasons.
This is the third straight quarter of falling volume growth for ADHO which has come off from 23.9 per cent in the March 2015 quarter to only one per cent this quarter, albeit on a high base. Though Bajaj Corp has other brands such as Kailash Parbat Cooling Oil, Nomarks and Bajaj Brahmi Amla Hair oil, among others, it relies heavily on ADHO, which contributes 91 per cent to revenues.
While overall hair oil market was flattish, light hair oil market grew at six per cent. Kailash Parbat volumes fell 51 per cent and continued to lose share. Brahmi Amla Hair Oil, too, witnessed a 14 per cent volume decline. Nomarks revenues fell 25 per cent, as the company is repositioning the brand as a personal care product as against problem solving one earlier.
The company's revenues grew 3.6 per cent year-on-year to Rs 213 crore, against the Street’s estimate of Rs 228 crore. Strong margin expansion though aided the company’s net profit which grew 18.5 per cent to Rs 50 crore. A 335-basis point input cost savings to 34.1 per cent of sales aided earning before interest, tax, depreciation and amortisation (Ebitda) margin expansion. This metric grew 311 basis points year-on-year to 32.4 per cent in the quarter. Given no new launches, the company’s advertising spends fell 170 basis points to 17.9 per cent. The company increased its promotions in the quarter as reflected in the other expenses, which grew 96 basis points to 10.4 per cent of sales. Management will continue to do higher promotions than advertising spends to protect its market share. ADHO’s volume market share has remained largely stable at 58.7 per cent. Despite growing higher than the revenues, net profit missed the Street expectations by a huge 14 per cent.
The Bajaj Corp scrip fell 3.9 per cent and currently trades at about 21 times the 2016-17 estimated earnings, higher than its historical average one-year forward price-to-earnings ratio of 16 times. While analysts believe rural slowdown is likely to continue, management view around demand trends as well as Nomarks relaunch will be watched out for.
