Bajaj Consumer Care - Faster-than-expected recovery - ICICI Securities

2Q revenue grew 4% as hair oil category grew 1% in July-Aug'20. A consensus BEAT. New MD, Jaideep Nandi (joined on Jan 2, 2020) has his task cut out, taking charge during a weak demand situation. On the positive side, BaCo has the levers of (1) higher gross margins (resources to invest in ad-spends), (2) increasing direct distribution, (3) focus on rural India and (4) introduction of lower priced SKUs and increased focus on Baja Amla (gooseberry) Hair Oil to tackle downtrading by value seeking consumers. OCF / FCF grew 47% (lower receivables, higher payables). We stay believers. Clarity on cash utilisation, sustainability of volume growth in Almond Oil and trajectory of diversification are essential ingredients of sustained stock rerating. A high dividend payout ratio, in- line with previous years (with the exception of Jan'20) is the near-term upside trigger. We are hosting the conference call on Oct 19, Monday, 1100 hours IST.

- Revenue growth driven by rural demand: Revenue / EBITDA grew 4% / 1% respectively while PAT was flat. Domestic revenue and volume growth was 5% (our view) driven by, 1) distribution drive and 2) continuous media presence. Hair oil category recovered significantly in July-Aug'20 - value and volume growth of 1% and 3% driven by recovery in offtakes. General trade revenue grew 10% driven by rural growth which was > urban growth (both retail and wholesale market were under stress due to reverse migration of labour and lack of upcountry demand at wholesale markets). Revenue from alternate channels (modern trade, e-commerce etc.) declined 27% YoY. International revenue grew 19%.

- Margin decline largely due to higher input cost and inferior mix: Gross margin declined 70bps YoY to 66.4% driven by inflationary input costs (prices of Refined Mustard Oil increased 23%) and inferior mix due to downtrading. EBITDA margin also declined by 80bps YoY to 27.8% as higher other expenses (+230bps YoY) were somewhat offset by lower staff cost (-50bps YoY) and ad-spends (-170bps YoY).

- Other highlights: 1) Launched new SKUs for value-seeking consumers (Rs20 pack foe ADHO; Rs1 Sachet in Amla), 2) e-Commerce business quadrupled albeit on low base, 3) increased focus on Bajaj Amla (gooseberry) Hair Oil.

- Balance sheet and cash flows: Cash generation has increased significantly despite weak performance in1Q driven by significant decline in working capital - OCF / FCF grew 47% to Rs1bn / Rs1bn. Working capital days improved by 17 days to 2 days driven by lower receivable (-7 days) and higher payables (+10 days).

- Valuation and risks: Our earnings estimates remain unchanged; modelling revenue / EBITDA / PAT CAGR of 4% / 7% / 8% over FY2020-22E. Maintain ADD with DCF-based unchanged target price of Rs200. At our target price, the stock will trade at 13x P/E Mar'22E. Key downside risk is over-reliance on a single brand - ADHO.

Shares of Bajaj Consumer Care Ltd was last trading in BSE at Rs.184.15 as compared to the previous close of Rs. 181.65. The total number of shares traded during the day was 81597 in over 2692 trades.

The stock hit an intraday high of Rs. 188.7 and intraday low of 180.4. The net turnover during the day was Rs. 15115972.

Source : Equity Bulls

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