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.
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.