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Healthy volume growth
Bajaj Consumer Care (formerly Bajaj Corp) reported healthy 12.5% revenue growth to Rs2.2bn, beating our expectation of 9%, driven by 7.0% overall volume growth. Post relaunch of its flagship product Almond Drop Hair Oil (ADHO) in Q2FY19, it recorded 9.4% volume growth in Q3FY19. During Apr’18-Nov’18, ADHO offtake growth at 14.9% was more than double the category growth (~7%), leading to market share gains. Gross margin declined 110bps YoY to 66.3% due to higher raw material costs. However, softening input price trend is expected to be favourable going forward. We expect an aggregate ~50bps expansion in gross margin over FY20 and FY21. EBITDA margin contracted just 37bps YoY to 28.6% due to lower other expenses, despite 25% YoY increase in employee expenses. Resultant EBITDA grew 11% YoY to Rs634mn. PAT grew 8.9% YoY to Rs601mn, higher than our expectation of Rs549mn.
While we largely maintain our revenue and EBITDA estimates, our earnings estimates are revised upward by 3.9%/9.4% for FY19/FY20 due to higher non-operating income and lower tax rate. We introduce FY21E and roll forward our valuation base to Sep’20 from FY20. We upgrade the stock to BUY from Add with a revised target price of Rs450 (earlier Rs408) based on 26x Sep’20E EPS (earlier 26x FY20E EPS). The stock currently trades at a P/E of 22.1x Sep’20E EPS.
* Healthy 9% ADHO volume growth :
In Q3FY19, Bajaj Consumer Care reported 12.5% revenue growth driven by 7.0% overall volume growth, led by 9.4% growth in its flagship product ADHO. Rural markets continue to lead the overall market growth. Based on sales verticals, overall volume growth was driven by 5% YoY growth in general trade (~85% of revenues) and a strong 22% YoY growth in modern trade (~7% of revenues). After six quarters of de-growth, Canteen Stores Department (CSD) witnessed 34% YoY volume growth in Q3FY19. However, management remained cautious on its future growth prospects. We expect 7% ADHO volume CAGR over FY18-FY21.
* Gross margin declines in Q3FY19, however input prices soften :
During Q3FY19, average prices of LLP (liquid light paraffin), which accounts for ~30% of total cost, and refined oil (14-15% of total cost) increased by 21% and 13% YoY respectively (adjusted for input tax credit). However, with the relaunch of ADHO, the company had taken a 3.5% price hike in Sep’18. This reduced the impact of higher raw material costs on margins, with gross margin declining 110bps YoY to 66.3%. However, softening input price trend is expected to be favourable going forward. The company’s stock of LLP inventory (purchased at Rs82/kg vs current price of Rs72/kg) is expected to last till Feb’19.
* EBITDA up 11% YoY:
Employee costs grew 25% YoY to Rs240mn on account of ESOP expenses and increase in employee base in support and sales functions. Advertising expenses grew 13% YoY due to product re-launches. Management expects ad spend to increase further on new launches in coming quarters. However, management controlled other expenditure, which declined 5% YoY. Hence, EBITDA margin contracted a lower 37bps YoY to 28.6%. Resultant EBITDA grew 11% YoY to Rs634mn. PAT grew 8.9% YoY to Rs601mn.
* Upgrade to BUY with a revised target price of Rs450 :
We largely maintain our revenue and EBITDA estimates for FY19 and FY20. Management expects lower effective tax rate for FY19/FY20 due to MAT credit entitlement on new plant. Incorporating higher non-operating income and lower tax rate, our earnings estimates are revised upward by 3.9%/9.4% for FY19/FY20. We introduce FY21E and expect revenue, EBITDA and earnings CAGRs of 11.5%, 11.2% and 6.2% respectively over FY18-FY21 (PAT CAGR lower due to higher tax rate assumption at 30% for FY21 vs 21% in FY18). We roll forward our valuation base to Sep’20 from FY20. We upgrade the stock to BUY from Add with a revised target price of Rs450 (earlier Rs408) based on 26x Sep’20E EPS (earlier 26x FY20E EPS). The stock currently trades at a P/E of 22.1x Sep’20E EPS.
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