Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai S t o c k I d e a BAJAJ CORP LTD.

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Gwendolyn Blake
6 years ago
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S t o c k I d e a Date: 03-August -12 CMP: `158 TARGET: `213 Upside: 35% B U Y SENSEX 17198 NIFTY 5216 Eq. Cap. (` Crs) 14.75 Face Value (`) 1.0 M.

Sensex Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052 www.latinmanharlal.com BAJAJ CORP LTD.

It is the market leader in the light hair oil (LHO) segment with a ~54% market share.

1 S t o c k I d e a Date: 03-August -12 CMP: `158 TARGET: `213 Upside: 35% B U Y SENSEX NIFTY 5216 Eq. Cap. (` Crs) Face Value (`) 1.0 M. Cap (` Crs) `2,330 BSE Code NSE Code Financial Year BAJAJCORP April-March 52-w H/L 163/95 Avg. Daily Vol. 69,186 TTM EPS (`) 8.77 TTM P/E (x) 18.0x BVPS (`) P/BVPS (x) 5.4x Stock vs. Sensex Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai BAJAJ CORP LTD. (BCL) Incorporated in 2006, Bajaj Corp Ltd (BCL) - The Shishir Bajaj Group Company - is India's 3rd largest producer of hair oils after Dabur India and Marico Ltd. It is the market leader in the light hair oil (LHO) segment with a ~54% market share. Prominent Brands in Light Hair Oil market It is the market leader in the light (non-sticky) hair oil (LHO) segment with a ~54% market share. The company markets hair oil under 4 brands, Bajaj Almond Drops (ADHO), Brahmi Amla (BAHO), Amla Shikakai (ASHO), Jasmine (JHO) and Kailash Parbat (KPCO). Strong Distribution Network: A key Positive Over the years, BCL has created a large distribution network (that continues to grow) which can be leveraged to introduce new products. The company reaches consumers through 2.38 mn retail outlets serviced by 6,178 direct distributors and 13,548 wholesalers. Continues to add market share in its flagship premium brand: Bajaj Almond Drops hair oil BCL focuses to convert coconut hair oil users to light hair oil users through sampling, targeted advertising campaigns and communicating the advantages of switching to lighter hair oils. It aims for a market share of ~65% by the year FY16E (currently at ~54%). Bajaj Almond Drops has created a unique positioning for itself through initiatives like product differentiation (Almond based), focused marketing, unique packaging (glass vs. plastic used by competition etc.) Acquired Uptown Properties an effort to improve operational efficiency In Sept 2011, BCL has acquired Uptown Properties, which owns a plot of land (with a built-up area of 33,600 sqf) at Worli, Mumbai. The aggregate cost of acquisition was `75 Crs. The reason behind the acquisition was to integrate its various scattered divisions/offices/departments (including sales & HR) under one roof (developing a corporate office) which would led to better synergies, faster decision making and improve the operational efficiencies. Aiming for more acquisitions: targeting entry into personal care space BCL is looking to carry out an acquisition and it is in advanced stages of discussions with FMCG companies in India and abroad. The acquisition will very likely be in the personal care space and the deal size is expected to be in the range of ` Crs. The acquisition could be of a brand or of an entity with a decent portfolio of brands that suits BCL s existing product portfolio. Moreover the products would have to be ones commanding gross margins upwards of 40-50%. Strong Operating metrics + Debt free + Cash rich Revenues have grown at a CAGR rate of 24.5% over the FY09 FY12. EBITDA has grown by 30.8% CAGR over FY09-12 and the average operating margin maintained at 24-25% levels over the period. PAT has grown at a CAGR rate of 36.7% over the FY09-FY12 period. It continues to maintain its Debt-Free status since incorporation (Year 2008). Cash and Cash Equivalent (including Investments) stood of `370 Crs which is ~86% of total balance sheet size of `428 Crs. For FY12, BCL has declared dividend of 400% amounting to `4 per share. At the CMP this results in a dividend yield of 2.6%. At the CMP of `158, the stock is trading at 13.4x its FY14E EPS of ` We recommend BUY on the stock with a months target price of `213, providing an upside of 35% from the current levels. Please Refer DISCLAIMER on the Last Page

2 Company Profile Market leader in the light (non-sticky) hair oil (LHO) segment with a ~54% market share Incorporated in 2006, Bajaj Corp Ltd (BCL) - The Shishir Bajaj Group Company - is India's 3 rd largest producer of hair oils after Dabur India and Marico Ltd. It is the market leader in the light (non-sticky) hair oil (LHO) segment with a ~54% market share. The company markets hair oil under 4 brands, Bajaj Almond Drops (ADHO), Brahmi Amla (BAHO), Amla Shikakai (ASHO), Jasmine (JHO) and Kailash Parbat (KPCO). With brands that have been in the market for 8 decades, it is part of one of the oldest business houses of the country. The Shishir Bajaj Group comprises of major companies like, Bajaj Hindustan Ltd, Bajaj Eco-tec Products Ltd, Bajaj Infrastructure Development Company and Bajaj Corp Ltd. The company is a subsidiary of Bajaj Resources Ltd. (BRL) and is the exclusive licensee of brands owned by BRL. Revenue Model Almond Drops hair oil contributed ~93.8% to the entire sales in 1QFY13. The company also produces oral care product under the brand name Bajaj Kala Dant Manjan or Bajaj Black Tooth Powder (BTP). The company's products have been in existence since 1953 and were sold by different Bajaj group companies. Company's products have been in existence since year 1953 BAHO 1.50% KPCO 3.90% JHO 0.30% ASHO 0.20% BTP 0.30% Revenue Mix ADHO 93.8% Manufacturing Units: 3 owned + 2 third-party units The company has 3 manufacturing plants at Parwanoo (Himachal Pradesh), Dehradun (Uttarakhand) and Ponta Sahib (Himachal Pradesh). Operations at Ponta Sahib - newest and most advanced manufacturing facility - commenced from March 2010, which more than doubled its production capacity for LHO top 74 mn litres p.a. BCL has also 2 additional third party manufacturing arrangements (1 in Rajasthan and 1 in Himachal Pradesh) for 9 mn litres p.a that makes the combined production capacity of ~83 mn litres p.a. Bajaj Corp Ltd August-2012

3 INVESTMENT POSITIVES Prominent Brands in Light Hair Oil market Almond Drops Hair Oil (ADHO) - A premium perfumed hair oil containing almond oil and Vitamin E. Competitors: Keo Karpin (Dey s Medical), Hair & Care (Marico), Clinic All Clear (HUL). Kailash Parbat Cooling Oil (KPCO) An ayurvedic formulation containing Sandal & Almond extracts. Competitors: Himani Navratna Brahmi Amla Hair Oil (BAHO) - Traditional heavy hair oil. Brand has been in existence since Competitors: Dabur Amla, Dabur Sarson Amla Amla Shikakai (ASHO) Variant in the heavy hair oil segment catering to price conscious consumers Competitors: Shanti Badam Hair Oil (Marico) Jasmine Hair Oil (JHO)- A Jasmine flower perfumed hair oil. In demand due to cultural significance. Competitors: Marico Parachute Jasmine Kala Dant Manjan (BTP) An oral care product for the rural market. Competitors: Virtually No competitors except Dabur Lal and Colgate Tooth Powder. LHO : one of the fastest growing segments in the hair oil market in India The overall oil market in India grew 1% in volume and 22% in value in FY12 against FY11. The Light Hair Oil market grew 17% in volume and 27% in value, while the Almonds Drops Hair Oil Market grew 21% in volume and 30% in value y-o-y in FY 12. Cooling Hair Oil market in India grew 12% in volume and 15% in value y-o-y in FY12. The company's market share in the Light Oil category has grown from 49% to 51% in Volume terms and from 53% to 54% in Value terms on a y-o-y basis in FY12. Bajaj Corp Ltd August-2012

Strong Distribution Network: A key Positive Factory (5) Owned: Himachal Pradesh (2) + Uttarakhand (1) Third Party: Himachal Pradesh (1), Rajasthan (1) Central Warehouse (1) Regional Distribution

4 Strong Distribution Network: A key Positive Factory (5) Owned: Himachal Pradesh (2) + Uttarakhand (1) Third Party: Himachal Pradesh (1), Rajasthan (1) Central Warehouse (1) Regional Distribution Center (29) Urban Distribution Rural Distribution Redistribution Stockist Super Stockist (182) (1,827) Sub-Stockist (4,351) Retail Outlets (1,008,072) Retail Outlets (1,377,340) Source: Company Over the years, BCL has created a large distribution network (that continues to grow) which can be leveraged to introduce new products. The company reaches consumers through 2.38 mn retail outlets serviced by 6,178 direct distributors and 13,548 wholesalers. Aims for a market share of ~65% by the year FY16E. Continues to add market share in its flagship premium brand: Bajaj Almond Drops hair oil BCL focuses to convert coconut hair oil users to light hair oil users through sampling, targeted advertising campaigns and communicating the advantages of switching to lighter hair oils. It aims for a market share of ~65% by the year FY16E. Bajaj Corp Ltd August-2012

5 Mar'03 Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 55 Price per of 100ml of Bajaj Almond Drops Hair Oil has continuously on rise Price per 100ml (`) 25 Source: Company Bajaj Almond Drops has created a unique positioning for itself through initiatives like product differentiation (Almond based), focused marketing, unique packaging (glass vs. plastic used by competition etc.) Acquired Uptown Properties an effort to improve operational efficiency Reason behind the acquisition is to integrate its various scattered divisions under one roof. In Sept 2011, BCL has acquired Uptown Properties and Leasing Pvt Ltd (Uptown), which owns a plot of land (with a built-up area of 33,600 sqf) at Worli, Mumbai. The aggregate cost of acquisition was `75 Crs, comprising of taking over of net liabilities of `49.5 Crs and purchase of the entire paid-up equity share capital from its existing promoters at consideration of `25.5 Crs. Consequently, Uptown has become a wholly owned subsidiary of the company with effect from Sept 28, The reason behind the acquisition was to integrate its various scattered divisions/offices/departments (including sales & HR) under one roof (developing a corporate office) which would led to better synergies, faster decision making and improve the operational efficiencies. The company would redevelop the place over the next 3 years. Aiming for more acquisitions: targeting entry into personal care space Acquiring companies beyond the hair oil space to complement its core categories BCL is looking to carry out an acquisition and it is in advanced stages of discussions with FMCG companies in India and abroad. The acquisition will very likely be in the personal care space and the deal size is expected to be in the range of ` Crs. The acquisition could be of a brand or of an entity with a decent portfolio of brands that suits BCL s existing product portfolio. The company is targeting products that have the potential to be ` Crs brands in the near future. Moreover the products would have to be ones commanding gross margins upwards of 40-50%. Apart from acquisitions, BCL is also exploring possibilities to build a small manufacturing plant in Gujarat. Bajaj Corp Ltd August-2012

6 Exploring possibilities to build a manufacturing plant in Gujarat On the overall business front, BCL sees no slowdown in the rural market despite the bad overall macroeconomic trend. The company, in fact, took an average price hike of 8.5% in March to compensate for the rise in input costs. However the company has no plans to hike prices further at the moment. After paying for the acquisition of Uptown Properties and Leasing Pvt Ltd, the company has cash & cash equivalents (including unquoted investments) of ~`370 Crs in its balance sheet (FY12). This combined with debt (if required) can be utilised for a strategic buy-out. BCL raised ~`300 Crs via an IPO of shares in Aug 10. It had set an issue price of Rs 660 a share. In May this year, the company split its each share of `5 into five shares of Re 1 each. Strongly working towards Brand visibility Currently looking for creative agencies for hair oil brands BCL is currently in conversation with several creative agencies for all the 5 brands and the process is underway. Draftfcb Ulka is the incumbent creative agency on the BCL hair oil product portfolio, including all 5 brands. Of these, Cartwheel Creative has already bagged the creative mandate for Bajaj Almond Drops Hair Oil, the flagship brand of BCL. Bajaj Almond Drops Hair Oil has a strong hold in the LHO market and was most recently being endorsed by Bollywood actor Kangna Ranaut. Barring this brand, the authorities are currently looking for creative agencies for the other hair oil brands. Exports to major countries The company is exporting their brands to many countries including UAE, Mauritius, Malaysia, Kuwait, Maldives, Oman, Kenya, Saudi Arabia, Uganda, Singapore, Myanmar, Pacific Islands (New Zealand, Australia, Fiji Islands) West Indies, Sri Lanka, Bangladesh, Afghanistan, Cambodia, Nepal and USA. Strong Operating metrics + Debt free + Cash rich Revenues have grown at a CAGR rate of 24.5% over the FY09 FY 12. EBITDA has grown by 30.8% CAGR over FY09-12 and the average operating margin maintained at 24-25% levels over the period. PAT has grown at a CAGR rate of 36.7% over the FY09-FY12 period. It s a completely Debt-Free company since incorporation (Year 2008). Cash and Cash Equivalent (including Investments) stood of `370 Crs which is ~86% of total balance sheet size of `428 Crs. Positive operating cash flows over past 4 years. For FY12, BCL has declared dividend of 400% amounting to `4 per share. At the CMP this results in a dividend yield of 2.6%. Promoter holding is high at 85% (~10% offloading to institutions likely soon to pare promoter holding to at least 75%. Bajaj Corp Ltd August-2012

CONCERNS Any adverse move in Major raw materials - LLP (Light Liquid Paraffin) and Refined oil - which the company won t be able to pass on to consumers through price hike would affect profitability.

We recommend BUY on the stock with a 12-18 months target price of `213, providing an upside of 35% from the current levels. Source: Company, LMSPL Research Registered Office: 124 Viraj, S,V.

7 CONCERNS Any adverse move in Major raw materials - LLP (Light Liquid Paraffin) and Refined oil - which the company won t be able to pass on to consumers through price hike would affect profitability. VALUATIONS At the CMP of `158, the stock is trading at 13.4x its FY14E EPS of ` We recommend BUY on the stock with a months target price of `213, providing an upside of 35% from the current levels. Source: Company, LMSPL Research Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) research@lmspl.com LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. Bajaj Corp Ltd August-2012

Investor Presentation. August 2012

Investor Presentation. August 2012 Investor Presentation August 212 Industry Overview 2 Industry Size and Structure FMCG Rs.167,64 cr (USD 33.4 bn) Hair Care Rs. 12,815 cr (USD 2.6 bn) 8% salience Shampoo Rs. 3973cr (USD 795 mn) (31.%)*