BAJAJCON reported 11%, 8% and 9% y-o-y growth in revenues, Ebitda and net profit; all marginally ahead of our estimates. A steady quarter defying some slowdown in consumer staples, healthy trends (market share gains and offtake growth tracking ahead of primary) and new product launches keep us optimistic of earnings growth acceleration. Valuation is undemanding relative to peers. We upgrade to Buy from ADD with fair value of `410 (`405 earlier).
A decent quarter led by ADHO
Bajaj Consumer care reported net revenues of `2.4 bn (+11% y-o-y, 2% above estimate), Ebitda of `777 mn (+8% y-o-y, 5% above estimate) and recurring PAT of `606 mn (+9% y-o-y, 1% above estimate). Overall volumes grew 5.5% y-o-y (KIE 6%) led by 7.2% growth in ADHO volumes. International business was back on the growth path with strong 56% growth on a weak base while CSD channel declined 16% y-o-y. Gross margin at 66.3% was down 100 bps y-o-y owing to RM pressure but 40 bps better than our estimate. We note that BAJAJCON has broadly maintained gross margin in FY19 thanks to smart and proactive RM procurement and timely price increases. FY19 performance— Volumes grew 4.5% y-o-y; net operating revenues grew 10.5% y-o-y; Ebitda grew 8% y-o-y; and net profit grew 5% y-o-y.
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ADHO: volumes and Nielsen trends tracking well; new product launches likely to boost growth
ADHO’s volume growth recovery (9.4/7.2% y-o-y in Q3/Q4) following the product restage is encouraging. Further, the gap between reported revenue growth and offtake growth (per Nielsen) continued for the third consecutive quarter. As per Nielsen, ADHO’s offtake value growth was 19.1% y-o-y in Jan-Feb 2019, significantly higher than 11% revenue growth reported by the company. ADHO continues to gain share in the total hair oils space (value share up 30 bps y-o-y to 8% in Jan-Feb 2019 per MAT Feb 2019) and its offtake was 2X that of category. Assuming Nielsen is capturing the primary sales trends right, traction in ADHO should continue. Additionally, we expect recent product launches to boost revenue growth in FY20e.
Upgrade to Buy with FV of `410
We raise FY20-21 earnings estimates by 2-5% as we (i) model revenues and higher marketing expense pertaining to recent product launches (Bajaj Cool Almond Drops and Nomarks Ayurvedic sunscreen cream), (ii) tweak realisation assumption (price hike in Q1FY20e) and RM costs (inflation in LLP), and (iii) reduce tax rate to 22% in line with guidance. BAJAJCON stock has corrected 22% over the past three months despite decent operating performance. We upgrade the stock to Buy with fair value of `410 (`405 earlier). Valuations are not demanding. Key to
re-rating would be (a) recent ADHO volume momentum sustaining and/or (b) success in new launches.