2 nd Aug, 2010 Bajaj Corp Ltd. Research By, Bhaskar Pranav & Anand ANS Research Desk (Research Wing of ANS Pvt Ltd) ARHAM Financial Centre Harihar Chowk, RAJKOT (Guj) Speak to: 0281 6699401 Drop a line to: research@anspl.net
Issue Details Sector Household & Personal Product Issue Size 45,00000 Equity Shares QIBs * 2,700,000 Non-Institutional* 450,000 Retail* 1,350,000 Face Value ` 5 Price Band ` 630 - ` 660 Per Equity Share BRLMs KOTAK MAHINDRA CAPITAL COMPANY LIMITED Registrar Karvy Computershare Private Limited Company Address: Registered Office 2nd Floor, Bld No. 2, Solitaire Corporate Park, 167, Guru Hargovind Marg, Chakala, Andheri (E), Mumbai 400 093 Phone: + (91 22) 66919477 / 78 Fax: + (91 22) 66919476 Email: complianceofficer@bajajcorp.com Website: http://www.bajajcorp.com * Minimum allotment RATINGS: CRISIL has given an IPO rating of GRADE 4 to the issue suggesting above average fundamentals for the company. Bajaj Corp is one of India's leading producers of hair oils. The company is a part of the Shishir Bajaj Group companies (the 'Bajaj Group'). Bajaj Corp incorporated as 'Bhaumik Agro Products Private Limited' on April 25, 2006 under the Indian Companies Act, 1956 with the Registrar of Companies (RoC), Maharashtra. The company's name was changed to 'Bajaj Corp Private Limited' pursuant to a special resolution of the shareholders' of the company dated July 18, 2007 and consequent to such change of name, a fresh Certificate of Incorporation dated September 11, 2007 was issued by the RoC, Maharashtra. Pursuant to a special resolution of the shareholders of the company on September 14, 2007, the company was converted into a public company, and the name of the company was further changed to 'Bajaj Corp Limited' and consequent to such change of name, a fresh Certificate of Incorporation dated October 16, 2007 was issued by the RoC, Maharashtra. The company commenced manufacturing and sales of its products in April 2008. Its products have been in existence since 1953 and were sold by different Bajaj group companies. BSL an erstwhile Bajaj group companies manufactured and sold its products until December 2000. In January 2001, pursuant to a scheme of demerger, BSL transferred its operating business and assigned the trademarks for all the brands to its subsidiary Deccan Ayurvedashram Pharmacy Limited which subsequently changed its name to BCCL. Subsequently, pursuant to the execution of the Trademark License Agreement between BCCL and BCL, BCCL assigned the trademarks for the products in its favour. The company's key products are Bajaj Almond Drops, a premium brand that is currently the market leader in the light hair oil segment. Almond Drops accounted for approximately 92% of the net sales in the nine-month period ended December 31, 2009. In addition, the company markets its hair oil under the brand names Brahmi Amla, Amla Shikakai, Jasmine Hair Oil and Bajaj Almond Drops. The company also produces oral care products under the brand name Bajaj black tooth powder. The company manufactures its products at two company-operated facilities in Parwanoo and Dehradun. It also expects to open a third company-operated facility in the first quarter of calendar year 2010 at Paonta Sahib. By completing this 3,500 square meter facility in Paonta Sahib, we expect our production capacity for light hair oil to increase from 39 million litres
per annum to 74 million litres per annum. In addition, it also engages third-party manufacturers at Parwanoo, Himachal Pradesh for hair oils and Udaipur, Rajasthan to produce its oral care products. These third-party facilities have a combined installed capacity of 9 million litres per annum. As of December 31, 2009, the combined production capacity for all company and third-party operated production facilities was 83 million litres per annum. The company markets its products through our in-house sales team as well as sales personnel employed through its distributors. These sales personnel are responsible for making its brands available throughout India. It manages a distribution network that includes 4,300 distributors, or 'stockists', that sell to more than 1.49 million retail outlets located throughout India. Business area of the company The company is engaged in the manufacturing of hair oils. The company markets its hair oil under the brand names Brahmi Amla, Amla Shikakai, Jasmine Hair Oil and Bajaj Almond Drops. Source :ACE Equity The net issue proceeds will be used for following objectives: The following table summarises the intended use of the proceeds of the Issue: Expenditure Items Promote our future products Acquisitions and other strategic initiatives General Corporate Purposes Amount to be utilized (` In Millions) `2200 `500 [_] Source: Company RHP
INDUSTRY OUTLOOK Source :RHP The Indian FMCG industry is worth ` 1,161,000 mn out of which hair care industry represents 8 % market share at ` 91,500 mn Of the 8% hair care industry the hair oil market is at ` 50,400 mn or about 4.34% of the FMCG industry. Out of the total hair oil market the light hair oil market represents about 14% of the hair oil segment. According to RHP there has been a steady decrease in the consumption of unbranded hair oil and an increase in the branded hair oil segment. Also the light hair oil is very popular among young population of urban India due to its characteristic.
POSITIVES AND CONCERNS ABOUT THE COMPANY Positives Healthy Growth in Sales The company s sales have grown at a CAGR of 32.4% in last three fiscal years and the overall hair oil industry has grown at a CAGR of 6.83% which shows that the company is growing at a significantly faster pace then the industry. Leading brands Almond Drops is their leading product brand and currently comprises approximately 92.4% of the company s net sales. Almond Drops is a premium light hair oil containing almond oil and Vitamin E, which contribute to the product's reputation for leaving users with healthier hair. Unlike most hair oils which are packaged in plastic PET bottles, Almond Drops is packaged in glass bottles, which preserves the product for a longer period of time even in high temperatures generally experienced throughout India. Brahmi Amla, the company s key product in the traditional hair oil segment, has developed a loyal customer based since it began production in 1953. The strong positioning of these brands has contributed to sustained increases in both the price and volume of these products and we expect this trend to continue as the hair oil market continues to grow, and in particular as the light hair oil market continues to capture market share from the coconut hair oil segment. Wide distribution reach The company has established a strong distribution network in India and currently has 4,600 distribution stock points for direct distribution and 8,900 wholesalers for indirect distribution of its products. Based on the Nielsen Retail Audit Report, it is estimated that its products are sold in more than 1.56 million retail outlets across India, which is approximately 28.7% of the total hair oil outlets in India. The company s distribution network is supported by a comprehensive management information system ("MIS") whereby sales reports are generated by our on-theground sales force. Strong financial position The company has a strong financial position and enjoys a debt free status. Its PAT for the fiscal year ended March 31, 2010 was ` 839.1 million. The company is in a position to raise additional funding at lower rates due to its current zero debt on its books.
Relationship with the Bajaj Group The Bajaj Group was founded in 1926 by Shri Jamnalal Bajaj. Today, the Bajaj Group is one of the India's leading conglomerates operating companies in a variety of industries such as sugar, consumer goods, power generation and infrastructure development. Over the past 84 years, the Bajaj Group has grown with India, enduring periods of uncertainty, hardship and progress. Establishments in the tax free zones The company s facilities are established in the tax free zones and enjoys tax exemptions from excise duty for 10 years from the fiscal year ended march 31,2009 and income taxes for the first five year followed by concessional income tax for the next five year. The company s current effective tax rate is approximately around 17% for fiscal year ended March 31,2010 Concerns Dependence on a single product The company s leading brand Bajaj Almonds Drop in the light hair oil segment accounts for around 92.4% of net sales and 93% of gross profit of the company. The company s dependence on the single product may impact its revenues and income if there is decrease in demand in the light hair oil segment. Fluctuation in the prices of the raw material Company s principal raw material Liquid light paraffin (LLP) produced from crude oil saw wide fluctuation in the prices for the fiscal year ended March 31,2009 due to fluctuation in the price of the crude oil. Going forward the changes in the price of the raw material remains a concern which would impact the bottom line. Raw material as a percentage of total costs has steadily increased from 33.6% in 2009 to 40.8% in 2010. Significant competition in the hair oil segment The company faces a stiff competition in the hair oil industry. Although the company has the largest share in the light hair oil industry it faces stiff competition from its rivals like Deys Medical, Dabur,Marico,HUL.
End of tax holiday The exemption in the excise duty will be over after 10 years and the income tax rate would increase going forward which would impact bottom line. Significant IPO portion utilized in the promotion of the future products Around 74-77% of the IPO proceeds would be used for the promotion of the future product line of the company. These costs are in the nature of advertising and brand building expenses and will not result in the creation of any tangible assets. Significant payment of dividend before the IPO The company paid a whopping 700% dividend in Dec,2009 and a dividend of 176% in March,2010 just before the IPO. FINANCIAL HIGHLIGHTS The company Bajaj Corp Ltd. (BCL) was carved out from its parent Bajaj Consumer Care Limited only in 2008. For FY10 the company BCL clocked a revenue of 330 Crore and PAT of 84 crore. Balance Sheet (Standalone Results) (Rs. In Millions) Particulars Mar 2010 Mar 2009 Mar 2008 Total Assets 524.31 745.57 50.97 Total Liab & Prov 268.21 229.78 1.98 Total Debt 0.0 0.0 0.0 Networth 256.10 515.79 48.99
Profit & Loss (Standalone Results) (Rs. In Millions) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Income 3299.96 2444.22 0.0 Other Income 51.34 17.65 0.01 Total Expenditure 233.14 1991.23 0.30 Dep. & Amortization 8.76 4.4 0.16 Interest 0.0 0.0 0.0 Tax 176.42 59.11 0.35 PAT 839.13 469.92 (0.63) RECOMMENDATIONS Source: Company RHP Valuations Price Band EPS# BV# P/E P/B.V. 630 23.05 10.24 27.33 61.52 660 23.05 10.24 28.63 64.45 Bajaj Corp Ltd. (BCL) is trading at a PE of 28.63X at the upper price band and at 27.33X at the lower price band, the company s weighted average earnings per share is ` 23.05.The industry PE is at 32.85X with the highest PE at 42.90X and lowest PE at 22.80X. The company s PE is significantly below the industry average and at significantly lower level then its industry peers. Even though the company looks attractively based on PE to its competitors its single product dependence poses a significant risk. The company s book value is very low due to the interim dividend payment twice in the short term of 700% on shares of FV ` 1 in Dec,2009 and a dividend of 176% on shares of FV ` 5 in March,2010. Due to the company s reliance on a single product (Bajaj Almonds Hair Oil) the pricing looks expensive. But given the firm is in FMCG industry the demand of product may increase. Hence investors with long term perspective may invest in this IPO. Although looking at overall product line we remain Neutral on this IPO. Disclaimer: The information being provided to you is compiled from sources we believe to be reliable. ANS Pvt. Ltd cannot and does not take any guarantees about the accuracy, reliability, validity or timeliness of the information and/or data provided/made available to you in this document. The views are purely indicative. Neither ANSPL nor any of its associates, subsidiaries, affiliates, directors, and/or officials become liable or have any kind of responsibility for any loss or damage that you may incur from any decisions taken by you based on our recommendations. None of the information contained herein constitutes a solicitation from ANSPL to Buy and/or Sell securities and/or any Future, Options or Other Financial Contracts. Clients may exercise their own caution and double check or verify the information contained in our recommendations.