Stock Recommendation | Bajaj Corp. - ADD - Target price : 405

BJCOR re-staged its flagship product ADHO in August 2018 (cosmetic changes to packaging). A planned channel de-stocking across the country ahead of the marketing campaign and launch of the re-staged product resulted in weak primary sales during the quarter. Per management, re-stocking began in September and will continue until November. Further, a late festive season this year and post-GST re-stocking in the base quarter were other factors leading to weak primary sales (flattish volumes). These factors explains the gap between offtake value growth of 25% yoy (per Nielsen report, September 2018) for ADHO (reflecting strong 200 bps+ market share gains in the light hair oils space) and BJCOR’s reported primary sales growth of 1.3% for domestic business and 3.7% for domestic business ex-CSD (army canteens).

While headline numbers are disappointing, healthy trends and market share gain in ADHO (per Nielsen) keeps us hopeful of an improvement in earnings growth trajectory. The company continues to invest in its vision of an expanded portfolio as reflected in a significant increase in cost structure. Stock performance hinges on execution of its portfolio expansion vision. We remain hopeful and stay constructive on the stock. Reasonable sector-relative valuations provide a decent margin of safety even as timing of inflection in operating performance is difficult to predict. ADD stays with an unchanged fair value target of ₹ 405/share.

▶ Market share trending up. Management highlighted that ADHO’s volume market share in the light hair oils category was 59.8% (+160 bps yoy) and its value market share was 62.2% (+130 bps yoy) (source Nielsen audit report; MAT September 2018 versus MAT September 2017).
▶ RM inflation margin outlook. The management indicated that LLP (a key RM) prices have risen to ₹ 80/Kg. BJCOR is consuming slightly lower cost inventory (₹ 72/Kg) as of now. Thus, it expects some more RM cost pressure on financials. Additionally, it is witnessing inflation in select other RMs and packaging material as well. Price increases taken towards the end of 2QFY18 would help the company largely offset RM headwinds at current levels of RM price.
▶ New product pipeline on track. Management indicated that a new product pipeline is tracking ahead of requirements. It plans to launch one product in domestic market towards the end of this quarter. Additionally, it also plans to launch a new product in the international market.
▶ International business. Challenges continued and revenues declined 6.8% yoy. The management expects improvement going forward in view of good secondary sales and a favorable base. Further, they are planning to launch an innovative product in international market.
▶ Comments on NOMARKS performance. NOMARKS’ offtake growth was 32% and domestic sales growth was 16% in 2QFY19.
▶ Other data points. (1) BJCOR launched ₹ 10 pack in a Pet Jar format to upgrade ₹ 1 sachet consumers in rural markets, (2) BJCOR’s direct reach is 0.49 mn retail outlets (up 2.5X in the past 2.5 years) and the management intends to expand it to 0.54 mn outlets by end of FY2019E, (3) wholesale contribution has come off to 33% from 60% over the past 2.5 years, (4) Ad spends were consciously reduced in July and August ahead of ADHO re-staging to enable concentrated marketing post re-staging, (5) ESOP cost was ₹ 8 mn for the quarter.

Definitions of ratings

BUY	-	We expect this stock to deliver more than 15% returns over the next 12 months.
ADD	-	We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE	-	We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL	-	We expect this stock to deliver

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR	=	Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS	=	Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC	=	Not Covered. Kotak Securities does not cover this company.
RS	=	Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA	=	Not Available or Not Applicable. The information is not available for display or is not applicable.
NM	=	Not Meaningful. The information is not meaningful and is therefore excluded.

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