Bajaj Corp - Result Update - BUY - Decent Performance; Recovery in Sight - Reliance Securities

In the light of demonetisation and its resultant impact on consumer demand, Bajaj Corp has reported decent numbers in 3QFY17. Its net sales fell by 4.8% yoy to Rs1.9bn, while net profit grew by 17.2% yoy to Rs578mn aided by favourable base that included amortisation charge of Nomarks. We expect recovery in demand in FY18E owing to improved consumer sentiments and higher currency circulation. Expecting 9.1% & 21% CAGR in revenue and earnings through FY16-18E, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs481.

Management Commentary on Demonetisation

According to the management, post demonetisation the Company witnessed sharp fall in sales for couple of weeks. However, situation improved gradually towards end of November, which normalised in general trade channel in December. Though Modern Retail has grown at a faster rate, wholesale channel continues to be under severe pressure. Bajaj Corp's sales from wholesale channel fell by 30% yoy in 3QFY17. Urban demand has recovered at a relatively faster pace than rural counterpart on the back of higher currency circulation in metros and large cities. Going forward, Bajaj Corp would focus on increasing its direct distribution reach to counter the fall in wholesale channel.

Volumes fall in line with Estimates

Overall volume fell by 6.5%, while the volume of flagship ADHO decreased 4.2% yoy. Gross margins rose by 260bps to 65.5% owing to lower prices of LLP and vegetable oil. Benefiting from forward booking of LLP, Bajaj Corp has a cover till 4QFY17. The management stated that in the event of further increase in crude oil prices, the Company would take a price hike in 1QFY18 to maintain margin profile. Notably, Bajaj Corp has not hiked price in last two years. Employee cost rose by 260bps yoy to 8.4% of sales mainly on the back of negative operating leverage and key hires in second line of leadership. Other expenses too rose by 280bps yoy to 17.5%. Hence, the resultant EBITDA margins fell by 180bps to 32.8%.

Outlook & Valuation

We expect Bajaj Corp to post revenues of Rs9bn & Rs10.3bn, net profit of Rs2.4bn & Rs2.9bn and EPS of Rs16.4 & Rs19.7 in FY17E & FY18E. At CMP, the stock trades at PE multiple of 19.6x FY18E earnings. We believe that, market leadership with strong pricing power in light hair oil market, likely recovery in demand post normalisation in currency circulation and focus on direct distribution would drive growth for Bajaj Corp, going forward. We reiterate our BUY recommendation on the stock with a revised Target Price of Rs481, based on 22x Dec'18 earnings.

Shares of BAJAJ CORP LTD. was last trading in BSE at Rs.392.85 as compared to the previous close of Rs. 384.6. The total number of shares traded during the day was 6370 in over 286 trades.

The stock hit an intraday high of Rs. 394 and intraday low of 385.4. The net turnover during the day was Rs. 2489165.

Source : Equity Bulls

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