Volume growth momentum, rise in rural demand and channel stabilisation would aid Bajaj Corp’s volume growth. Also, conversion from coconut hair-oil to light hair-oil is expected to accelerate with increase in coconut oil prices. However, with a steep increase in costs of crude-linked inputs, the company selectively raised prices, which we believe would partially safeguard margins. Thus, we retain our Hold recommendation.
We believe that, with 68% of the Indian population being rural-oriented, 40% of the company’s sales being in rural markets gives it immense opportunities to grow with rising rural demand, which had been constrained for the last two years. Bajaj Corp is seeing a pick- up in rural demand where rural off-take was equal to urban off-take during Q4. Moreover, with prices of coconut oil inching up, the faster conversion from coconut oil to light hair-oil is being seen in rural areas. With rural recovery on the way, management intends to focus on driving sales of smaller SKUs (65-67% of revenue), resulting in overall volume growth. Management is optimistic of achieving double-digit growth in rural demand.
Crude-linked input costs rose 40%, impacting 50% spend on LLP, freight cost and plastic prices; while the inflation in raw material is expected to be 10% in FY19. We expect gross margins to be under pressure, offset to some extent by operational efficiency. Thus, we expect the EBITDA margin to be flat over FY18-20.
Factoring in 7% and 9% volume growth in FY19 and FY20 respectively and assuming steady overall demand uptick in rural and urban areas, we expect 11% and 12.5% CAGRs respectively in revenue and earnings over FY18-20. We maintain our Hold rating on the stock, with a revised target price of Rs 460, based on 25x FY20e EPS. Risks. Keener competition and slow consumer shift to light hair oil.