Bajaj Corp ltd (NSE Code BAJAJCORP) - Jul'12 Katalyst Wealth Alpha Recommendation


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Bajaj Corp ltd (NSE Code BAJAJCORP) - Jul'12 Katalyst Wealth Alpha Recommendation

  1. 1. Bajaj Corp Ltd (NSE Code: BAJAJCORP) – Alpha/Alpha + stock recommendation for Jul’12
  2. 2. Content Index1. Investment Snapshot2. Bajaj Corp Ltd – An Introduction3. Hair Oil Industry4. Bajaj Corp Ltd – Details5. Bajaj Almond Drops Hair Oil – Details6. Bajaj Kailash Parbat Cooling Oil – Details7. Brand building8. Performance Snapshot9. Operating Efficiency10. Shareholding Pattern11. Dividend Policy12. Valuations13. Corporate Governance issues and some clarifications14. Risks & Concerns
  3. 3. Dear Members,Bajaj is a name used across a whole set of products ranging from Two-wheelers to sugarand yes there’s “Bajaj Almond Drops oil” too.We believe, most of the members would have at some point of time used “Bajaj Almonddrops oil”, and since males constitute a dominant share of the members of our services,their wives/mothers/sisters may have used the product.The makers of Bajaj Almond Drop oil, Bajaj Corp Ltd is listed on the Indian bourses withthe following codes (NSE – BAJAJCORP; BSE – 533229), though a relatively new listingdating back to 18th Aug’10.So, let’s get down to the details and assess the brand equity and investment worthiness ofthe company:Bajaj Corp Ltd (NSE Code – BAJAJCORP) is the second largest company in the ShishirBajaj Group of companies (known for Bajaj Hindustan). The history of Bajaj Corp datesback to 1953 when Mr. Kamalnayan Bajaj established Bajaj Sevashram to market and sellhair oils and other beauty products. Bajaj Sevashram used to manufacture and sellproducts until December 2000. In January 2001, pursuant to a scheme of demerger of theerstwhile Bajaj Group, it transferred its operating business and assigned the trademarksfor all the brands to its subsidiary Bajaj Consumer Care Ltd (BCCL). In April 2008,pursuant to the execution of the Trademark License Agreement between BCCL and BajajCorp, BCCL assigned the trademarks for the products in favour of Bajaj Corp.Before we discuss the finer details, here’s a brief snapshot:  Market capitalization – Rs 1,915 cr.  Debt free  Cash and cash equivalents – Rs 330 cr.  Average cash flows from operations (post tax) for the last 3 years – Rs 92.50 cr.  Average Net profit for the last 3 years – Rs 96.03 cr.
  4. 4. Investment Snapshot (As on 21st Jul’12)Recommendation – BuyPortfolio Allocation Strategy – 1. Start with ~4-5% portfolio allocation in the range of 125-130. 2. We may consider increasing allocation to around 7-8% in case of a correction to 105- 110Profit Booking – Refer Alpha/Alpha + weeklyBSE Code – 533229; NSE Code – BAJAJCORPBloomberg Code – BJCOR: INMarket capitalization – Rs 1,915 cr.Total Equity shares – 14.75 cr.Face Value – Rs 1.0052 Weeks High/Low – Rs 145/ Rs 95.10Promoter’s holding – 84.75%
  5. 5. Bajaj Corp Ltd – An IntroductionBajaj Corp is the second largest company in the Shishir Bajaj Group of companies (knownfor Bajaj Hindustan). The history of Bajaj Corp dates back to 1953 when Mr KamalnayanBajaj established Bajaj Sevashram to market and sell hair oils and other beauty products.Bajaj Sevashram used to manufacture and sell products until December 2000.In January 2001, pursuant to a scheme of demerger of the erstwhile Bajaj Group, ittransferred its operating business and assigned the trademarks for all the brands to itssubsidiary Bajaj Consumer Care Ltd (BCCL). In April 2008, pursuant to the execution ofthe Trademark License Agreement between BCCL and Bajaj Corp, BCCL assigned thetrademarks for the products in favour of Bajaj Corp. The exclusive agreement is valid for aterm of 99 years from March 12, 2008 and is extendable for an additional ten years.Since Apr’08 Bajaj Corp Ltd has been manufacturing and selling the products and has nowbecome Indias third largest producer of hair oils and the largest producer of Light hairoils (LHO), capturing an estimated 54% of the light hair oil market by the end of FY 12,according to the Nielsen Retail Audit Report.Bajaj Corp manufactures and markets five major brands. The flagship brand of thecompany is Bajaj Almond Drops, while it also markets other hair oil brands such as BajajBrahmi Amla, Bajaj Amla Shikakai and Bajaj Jasmine Hair Oil. Off-late, one can also seecommercials of “Bajaj Kailash Parbat Cooling Oil” and as per the management they aregoing to promote it aggressively.Over the years, Bajaj Corp has carved out a niche category of Almond hair oil in the LHOsegment and the same has helped the company grow at a much faster pace than theoverall market and command a leadership position in the light hair oil segment with50.9% share in terms of volume and 54% share in terms of value. For FY 12 Almond Dropsoil accounted for ~94% of Bajaj Corp’s net sales of Rs 472 crore.Before we dig deeper into the operations of the company, let’s understand the industry inwhich the company operates.
  6. 6. Hair Oil IndustryThere are very few product categories left where home-bred Indian companies still holdsway. Multinational corporations lord over most of the segments. One exception is that ofhair oil. The entire market is controlled by Indian companies like Marico, Dabur India,Bajaj Corp and Emami. But is it worthwhile? Ask any of them and you will be told thathair oil profits are second to no other fast-moving consumer good.As per the Nielsen Retail Audit Report, for the year ended 2011 the total Hair care marketin India is valued at Rs 12,815 cr. Out of the same, Hair oil market is ~52% at 6664 cr.,while Shampoo, Hair Conditioners and Hair Dyes account for the remaining.It is important to note here that the above illustration reflects the size of the organizedHair oil industry. It does not account for unorganized and unbranded products andtherefore the actual size of the industry would be slightly higher than what is illustratedabove.
  7. 7. As can be observed above, Hair oil industry can broadly be divided into Coconut BasedOils and Perfumed Oils. Perfumed oils can further be sub-divided into Amla based oils,Light Hair oils (LHO), Cooling oils (CO) and others.Coconut Based Oils account for the largest share of the hair oil industry at 48%, howeverover the years it’s been losing market share to other categories such as LHO and CO withconsumers opting for new, lighter, and more modern hair oil products.And if you thought Hair oil was an old-economy product which people stop using oncethey move up the income chain, look at its annual growth; 12.5% CAGR in terms ofvolume and 19.8% CAGR in terms of value.
  8. 8. What about Light Hair oil segment? During the last 5 years organized hair oil industryrecorded a growth of 12.5% on annualized basis in terms of volume and 19.8% in terms ofvalue. While during the same period, LHO segment recorded a much higher growth of17.4% on annualized basis in terms of volume and 25.8% in terms of value.Even during the 3 months ended Jun’12; overall Hair oil market recorded a flattish volumegrowth of 4.7% while the LHO segment recorded a volume growth of 15.6%.The above figures point towards the fact that there are various factors at play behind theoverwhelming growth of Light Hair oil segment:  Gradual increase in usage of Hair oils  Conversion from un-branded to branded products  Conversion from Coconut based oils to Light Hair oilsCooling oil, another segment growing strong: As Light Hair oil, another segment i.e.Cooling Hair oil has emerged as an important segment in the Indian hair oil market.Cooling oils are hair oils meant for cooling the scalp during the harsh summer months.The ingredients in the cooling oils cause immediate relief by cooling the scalp. The CAGRof this category has been 20% over the last 5 years and around 16.5% over the last 3 years.
  9. 9. The above mentioned two segments i.e. Light Hair Oil and Cooling Oil are significantfrom the point of view of analyzing Bajaj Corp Ltd. as the company’s product portfoliocomprises of Bajaj Almond Drops hair oil and Bajaj Kailash Parbat cooling oil whichbelong to Light Hair oil and cooling oil segment respectively. Bajaj Corp Ltd – Details Bajaj Corp – Product portfolio Product Category Competitors CommentsBajaj Almond Drops Hair Light Hair Oil Keo Karpin (Dey’s Medical), ~94% contribution in terms of Oil (ADHO) Hair & Care (Marico), Clinic revenue and 36% CAGR in All Clear (HUL) sales over the last 5 years. Bajaj Kailash Parbat Cooling Oil Himani Navratna (Emami) New promising launch. Being Cooling Oil (KPCO) promoted aggressively. Faces very stiff competition from Himani Navratna which holds more than 50% market share.Bajaj Brahmi Amla Hair Amla based oil Dabur Amla The first product from the Oil (BAHO) stable of Bajaj Corp, though now contributes only 1.5% in terms of revenue and losing market share. Bajaj Amla Shikakai Amla based oil Shanti Badam Hair Oil Just 0.2% contribution to (ASHO) (Marico) revenue. Bajaj Jasmine Hair Oil Perfumed oil Minuscule 0.6% contribution. and others In demand to cultural significance.
  10. 10. Besides the competitors mentioned in the above chart, the biggest competitor for BajajCorp is Marico which is the largest player in the hair oil segment and dominates the hairoil and precisely the Coconut oil segment with its “Parachute oil brand”.As can be observed from the above chart, though Bajaj Corp has 5 products in its portfolio,Almond Drops hair oil (ADHO) is the major contributor with more than 93% contributiontowards the revenue of the company.The newly launched Kailash Parbat Cooling Oil (KPCO) is the second largest contributorwith ~4% contribution, while the contribution from the other brands is minuscule and theyhave been losing market share in their respective segments gradually. Bajaj Almond Drops Hair Oil – DetailsLaunched in 1989, Bajaj Almond Drops is the key brand of Bajaj Corp Ltd and is theleading brand in the light hair oil category. It is also one of the most premium hair oilbrands in India (illustrated later in the report).As per the Nielsen audit report Bajaj Almond Drops is the fastest growing brand in thehair oil category; growing in double digits year-on-year. It is already the largest brand inthe light hair oil category and currently accounts for more than 50% of this market. Being
  11. 11. light, non-sticky, it is believed to provide the traditional do-good benefits of nourishmentwithout having the biggest negative attached to a hair oil–stickiness.For any FMCG company to do well, the foremost thing is that products of the companymust find acceptance amongst the customers and then it entirely depends on the companyas to how aggressively it advertizes and promotes the products and establishes thedistribution network.As far as acceptability of Bajaj Almond drops is concerned, based on the randomly chosenreviews and comments available on the net, it seems the product is being liked for it beinglight, non-sticky and for its application on face and body besides the regular usage onHair. At the same time, some consumers have their reservation against the strongfragrance of the oil. However, on overall basis the reviews and comments were in generalpositive. {Here it is important to note that in general one does not bother to write goodcomments about any product, service on various forums on internet. The comments andreviews are largely posted by critics or those who have had bad experience of any sort.}Growth – Growth in sales volume is the real benchmark of the acceptability of the productand as far as Bajaj Almond drops is concerned, the brand has performed remarkably wellnotwithstanding the base effect.
  12. 12. Yes, even after gaining as much as 50% market share in the Light Hair oil segment,Almond drops has still been able to maintain 20% odd volume growth and growing muchfaster than all the other players, as can be easily understood from the below twoillustrations depicting industry growth:How well does the brand Bajaj Almond Drops deals with inflation? Warren Buffett oncesaid that, “Great business can overcome inflation”. How? According to Buffet, a greatbusiness exhibits the ability to hike prices readily and easily without necessarilyfearing losing market share or unit volume.Hike prices readily and easily – As far as Bajaj Almond drops is concerned, it’s brandequity has enabled the company to benefit from the inflationary environment and thusgrow its Sales and profits both on account of volume and price expansion, as the companyhas been able to consistently increase the prices of its products and thus pass on the hikein the prices of raw materials and the overall operating cost.
  13. 13. In the above illustration, as can be noticed the volume growth has been around 27.4%CAGR for the last 5 years, while during the same period the growth in terms of value hasbeen 35.9% CAGR. Thus, company has been steadily increasing the prices of Bajaj Almonddrops year on year in order to combat inflation and retain healthy margins.This is what the management had to say in the recent con-call as the company reportedmuch better margins on account of 8.6% hike in the MRP of Bajaj Almond Drops duringJun’12 quarter: What we normally try and do is we try and anticipate beside the raw and packaging materials aremoving and then take a price hike which is a little more than what is required to maintain the grossmargins. This time what happened was that LLP which is the major part of our cost close to 40% ofour cost actually deflated. It went down from Rs. 86 to Rs. 80, and therefore we have seen inflection of margin. I think a margin of 25% is what we would like to aim for. I think 28% was the good thing to happen to us.Without fearing losing market share or volume – Coming back to the definition of greatbusiness as defined by Warren Buffett, it exhibits the ability to hike prices readily andeasily without necessarily fearing losing market share or unit volumeWell, we have already noticed that Bajaj Corp has been able to steadily increase its priceswhile still growing its volume at 15-20% year on year, however it’s important to find out ifthe company increased the prices at the cost of market share or not?
  14. 14. The above illustrations do clearly indicate the fact that despite regular price increases,Bajaj Almond drops has been steadily gaining market share.Further, since the market share (in the light hair oil segment) of Bajaj Almond drops isslightly higher at 54.3% in terms of value in comparison to volume market share of 51.9%,it’s easy to understand the fact that Bajaj Almond drops commands a premium to otherhair oil brands in the Light hair oil segment.
  15. 15. Pricey, yet finding strong legs in rural areas – As illustrated above, Bajaj Almond drops isrelatively pricey in comparison to other brands and thus continues to be an urbandominated brand.However, there is no doubt about the fact that there lies immense potential for BajajCorp’s products in rural India which accounts for 72% of the Indian population and alarge share of unbranded hair oil sales.With the implementation of various Rural Income promotion schemes, the disposableincome is increasing in the hands of rural India and the brands with good penetration andlow unit selling price packs are likely to benefit the most.Bajaj Corp was quick to realize the potential of demand in rural India and thereby madeavailable Bajaj Almond Drops in sachets and other low unit selling price packs. Sachetsand 20 ml packs were launched by the company as early as 2004-05, and Almond Drops isstill the only brand (among its key competitors in LHO) which is available in sachets.As can be observed above, the saliency of sachets and 20 ml packs has more than doubledsince 2008-09 and this can be directly attributed to the fast paced sales volume growth inrural areas of India.Consider this: For FY 12, approximately 36.3% of the sales of Bajaj Almond drops can beattributed to rural India as compared to the fact that just 30% of its sales came from ruralIndia in FY 09.
  16. 16. Further, it’s interesting to note here that Bajaj Almond drops has slightly higher marketshare in the Light Hair oil segment in rural areas as compared to urban areas of differentstates. This can probably be attributed to the fact that other major players in the Light hairoil segment have still not made their brands available in sachets.Distribution Network – For any FMCG company, advertisement, sales and promotionand distribution network are the three major pillars behind an establishment of brand.No matter how much a company spends on advertisement, the presence of the product atthe point of sales is important for the consumers to be able to try the product for the firsttime. Thereafter, the shelf space occupied by the product, buying pattern of otherconsumers and obviously the product quality play an important role in establishing thebrand equity.
  17. 17. A product that is widely and easily available is likely to catch more eyeballs and therebygain a share of consumer’s mind space. It is easy to understand that how the above pointsact as a positive feedback loop for any well established brand, act as a sustainable moatand creates a vicious circle for the product/brand to outgrow competition.The second most important advantage of a wide distribution network is that company cantap the same to launch new products. For a well established brand with a distributionnetwork already in place, it’s far more easy to launch a new product and make itsuccessful than in comparison with the company which is starting fresh. This probablyexplains the reason behind the wide product portfolio of well established FMCGcompanies.As far as Bajaj Corp is concerned, over the years the company has been able to set up aformidable distribution network on pan India basis with its flagship product “BajajAlmond Drops” selling in more than 23.85 lakh retail outlets at the end of Jun’12.Consider this: During the Jun’12 quarter alone, the company expanded the distributionnetwork by 88,000 retail outlets.
  18. 18. In Hair oil industry, Marico and Dabur are the only two companies that have a largerdistribution network than Bajaj Corp for “Parachute Coconut oil” and Dabur Amla”respectively.As per the various reports, Dabur Amla is sold in ~25 lakh retail outlets while Parachuteoil is sold in ~40 lakh retail outlets in India. Though, considering the pace of growth andthe way the company has been expanding in rural areas, Bajaj Almond drops should soonbe able to outgrow Dabur Amla both in terms of sales and distribution network.This was all about Bajaj Almond drops. Let’s look at the details of the other upcomingproduct of the company, Bajaj Kailash Parbat Cooling Oil, launched just a year back inMay’11. Bajaj Kailash Parbat Cooling Oil – DetailsIn order to leverage on its brand equity in the Light hair oil segment and the distributionstrength of over 23 lakh retail outlets, Bajaj Corp had for long been looking at strategicbrand extension and new product launches. In line with this strategy, the companyforayed into the Rs 800 crore cooling hair oil segment with the launch of Kailash ParbatCooling oil in May’11.Over the last few years cooling oil has emerged as the second fastest growing segment inthe Indian Hair oil market. The ingredients in the cooling oils cause immediate relief bycooling the scalp and therefore the sales of the same are seasonal with maximum salesduring the March and the June quarter.
  19. 19. The CAGR of this category has been 20% over the last 5 years and around 16.5% for thelast 3 years.As far as competition is concerned, Emami’s “Himani Navratna Cooling Oil” is the un-disputed leader in the cooling oil segment with ~54% market share, while the secondlargest brand with ~28% market share is “Himgange” from a privately held company (G KBurman Herbal India Pvt. Ltd.)Thus, Kailash Parbat faces stiff competition; however the product has performed relativelywell and has already acquired 2.1% market share in terms of volume as at the end ofJun’12 (launched in May’11).We believe, since the base for the last year was extremely small it would not be prudent totalk of growth of the product at the moment. Any reasonable measure of the growth ofKailash Parbat cooling oil can only be made one year from now.However, it’s important to note here that management of Bajaj Corp does seem confidentof the prospects of the brand and are willing to put money behind advertisement, salesand promotion and distribution cost, unlike other products in their portfolio.
  20. 20. Distribution Network – We discussed about the importance of distribution network inestablishing the brand and also how the same can be leveraged to introduce new products.Bajaj Almond drops is being sold in 23.85 lakh retail outlets and Bajaj Corp has alreadystarted tapping the same for Kailash Parbat cooling oil. As per Nielsen Retail Audit report,at the end of Jun’12 Kailash Parbat oil was available in more than 3.22 lakh retail outlets. Brand building Total Advertisement & Net Sales (cr.) Adv. & Sales cost as % of Sales Promotion Sales Expense (cr.)FY 10 37.32 294.58 12.67%FY 11 40.47 358.67 11.28%FY 12 64.71 472.24 13.70%Q1 FY 13 17.36 138.05 12.58%As mentioned above, advertising, sales promotion and distribution are the three pillarsthat help drive the sales growth and thereby the market share.Bajaj Corp has already established a wide distribution network and is fast expanding thesame with every quarter. As far as advertising and sales promotion (ASP) is concerned,
  21. 21. the management has indicated that the spend will be in the range of 11-14% of sales, as has been the case over the last 3 years and for the quarter ending Jun’12. Since the company has been recording a sales growth of 30-35% annually, the expense on sales and promotion is increased accordingly. Further, as Bajaj Almond drops is already well-placed, the company enjoys operational leverage and can thus slightly manage advertising and sales promotion expenses i.e. vary the ratio in order to aggressively promote its new brand Kailash Parbat cooling oil. Like during the Jun’12 quarter, out of a total expenditure of 17.36 crore on ASP, company spent ~3 crore on Kailash Parbat and the remaining on Bajaj Almond drops. Compare this to revenue contribution of Rs 129.46 crore by Bajaj Almond drops against just Rs 5.45 crore by Kailash Parbat. Thus, company can leverage the brand equity of Bajaj Almond drops to promote its other products without hurting its profitability. Performance SnapshotParticulars (In cr.) Q1 FY 13 FY 12 FY 11 FY 10 FY 09Net Sales 138.24 473.32 359.44 294.92 250.27Operating Profit 38.92 116.64 108.93 97.74 51.64Operating Profit 28.19% 24.70% 30.37% 33.18% 20.63%Margin (%)Other Income 9.01 37.38 17.01 4.79 1.76Interest 0.02 0.08 0.11 0.13 0.06Depreciation 0.78 2.6 1.79 0.85 0.44Profit Before Tax 47.13 151.34 124.04 101.55 52.90Exceptional Items 0.00 0.00 18.6 0.00 0.00Tax 9.51 31.25 20.98 17.64 5.91Profit After Tax 37.62 120.09 84.10 83.91 46.99Profit After Tax 27.25% 25.43% 23.39% 28.49% 18.77%Margin (%)Cash from Opt. NA 89.84 101.45 86.07 51.38
  22. 22. As can be observed from the above illustration, the performance of the company has beenexcellent on various parameters: growth, margins, profitability, cash flows from operation,etc.It is important to note here that the management has indicated that they will strive tomaintain 25% + operating profit margins while maintaining the strong growth. In case ofBajaj Corp, material cost and advertisement and sales promotion are the two majorexpenses. The other operating expenses are very small (as a % of sales) as the companydoes not need an elaborate manufacturing set-up, as can also be observed fromdepreciation cost.As illustrated in the Pricing power section of Bajaj Almond Drops, Bajaj Corp has able toincrease the prices of finished products in line with the increase in prices of raw materialsand packaging cost while the advertisement and sales promotion expenses are maintainedin the range of 11-14% of net sales and therefore the company has been able to maintainoperating margins in excess of 25%.Further, the company is debt-free and since the manufacturing facilities didn’t requiremuch capital investment, the entire operating profits of the company flow down as profitbefore tax. The other income constitutes interest and dividends on ~ Rs 320 crore cashsurplus with the company (from IPO proceeds and free cash flows from operations).Bajaj Corp also enjoys lower tax rates as its manufacturing facilities are located in tax-freezones and thus enjoys exemptions from excise duty for 10 years from the fiscal year endedMarch 31, 2009 and income taxes for the first five years followed by a concessional incometax rate for the following five years.However, on account of changes in the tax rate by the Government in 2010, its effectiverate of income tax stands increased from approximately 11.3% for the fiscal year endedMarch 31, 2009 to approximately 17.0% now.
  23. 23. Operating efficiency Debt Avg. Fixed Avg. Net Sales *Operating *Operating Equity Assets (cr.) Working (cr.) Profit Before Cash flows ratio Capital (cr.) tax (cr.) before tax (cr.) FY 09 0.00 4.98 -5.02 250.27 51.14 57.55 FY 10 0.00 12.36 -3.66 294.92 96.76 103.05 FY 11 0.00 20.17 -8.73 359.44 107.03 122.83 FY 12 0.00 30.43 -22.33 473.32 113.96 120.36* Operating profit before tax excludes other incomeIn the above illustration we have excluded the surplus cash and the liquid investments infixed deposits and mutual funds to determine the capital being employed in the corebusiness of the company and the returns being generated on that capital.As can be observed above, the capital being employed is extremely low in comparison tothe returns being generated. Even the fixed assets at the end of FY 12 include ~Rs 15 crorespent on guest houses.The working capital requirement has been negative, i.e. the company gets advancepayment from its distributors (debtors) while it enjoys a certain credit period from itssuppliers and thus also explains the operating cash flows being generated by the companyyear after year. It reflects the kind of product pull enjoyed by great brands. Shareholding Pattern Jun’12 Mar’12 Dec’11 Sep’11 Jun’11Promoter and 84.75% 84.75% 84.75% 84.75% 84.75%Promoter Group India 84.75% 84.75% 84.75% 84.75% 84.75%Public 15.25% 15.25% 15.25% 15.25% 15.25% Institutions 9.80% 9.49% 8.94% 9.66% 9.71% FII 9.34% 9.20% 7.08% 5.71% 5.36% DII 0.46% 0.29% 1.86% 3.95% 4.35% Non-Institutions 5.45% 5.76% 6.31% 5.59% 5.54% Bodies Corporate 1.62% 1.96% 2.63% 3.43% 3.48%Total 147500000 147500000 147500000 147500000 147500000
  24. 24. The promoters hold 84.75% stake in the company and therefore they will have to bringdown the same to 75% or below before Jun’13 as per the latest public shareholding norms.There are two ways to go about it; either dilute equity by raising additional funds or thepromoters can sell their shares in the secondary market.In the recent con-call the management clearly indicated that equity dilution will only beconsidered if the company is able to close in any acquisition deal and thereby needsadditional funds, else secondary sale option would be opted: Ideally, what we would like is to do a primary offering and get the money into the company, for which we will have to justify the use of proceed and obviously if we are able to dovetail an acquisition, that will be the most utopian thing to happen. If that does not happen for some reason or the other, then we will have to look at a secondary sale option.Since the company is already sitting on the cash surplus of Rs 300 crores and generating~Rs 100 crore cash from operations year on year, secondary sale would be in the interest ofminority shareholders. Dividend PolicyAt the moment, it would be too early to speak of any dividend policy since it’s only beentwo years since the company got listed.For FY 11, the company paid around 1/3rd of net profits as dividend. Similarly, for FY 12the company paid a dividend of Rs 4/- per share which amounted to ~50% of the net profitof the company for FY 12. However, the management has clearly indicated that futuredividend payouts would depend on the funds requirement for inorganic growth.
  25. 25. ValuationsBy now we know that the company is very much worthy of investment (high dependenceon 1 product being a major risk, though company has already launched a new productand targeting niche brands which can benefit from Bajaj Corp’s strong distribution
  26. 26. network so that they can be made pan India brands), however for such companies,valuations play a spoilsport as most of the time they are too expensive.In case of Bajaj Corp, it is current available at a market cap of 1900 crore. We know that it’sa debt free company, holding close to Rs 330 crore as surplus cash and cash equivalents.Besides, from our above analysis, we know that the business model is excellent, being verylow on capital intensity, negative working capital requirement, backed by a good brandand consistently recording growth to the tune of 30%.At the current stock price, the market is valuing the operating business of the company atRs 1570 crore. In FY12, the company delivered a pre-tax operating cash flow of Rs 120crore. Given the trajectory of growth at which the company’s business happens to be, thisvaluation does not seem to capture expected future growth in earnings.Consider this: At present pre-tax AAA bond yields are 9% p.a. If Bajaj Corp’s businesswas a AAA bond, and it paid Rs 120 crore a year in perpetuity, then the value of this nongrowing perpetuity alone, at present interest rates would be Rs 1330 crore. One cantherefore see that of the total market value of Rs 1570 crore, Rs 1330 crore relates to thepresent value of future earnings if they were to not grow from here. The balance Rs 240crore relates to the growth component of value.In other words, at its current market value, the market expects Bajaj to grow its earnings atonly 1.35% p.a. over the long term, though; to us it seems that Bajaj Corp will continue togrow its earnings at a much higher rate for many years to come.Note: This is not to say that the stock cannot witness any short term corrections, however10-15% correction from current levels will make the stock extremely attractive for longterm investment. Corporate Governance issues and some clarificationsIn the past, there were concerns raised by some analysts regarding non-appropriate use ofcash reserves with the company. First, the company bought a piece of land for Rs 75 crore
  27. 27. for setting up administrative office and re-locating different administrative units at thesame place. Then, there were concerns raised that since the company is generating somuch cash, it may transfer funds to other Bajaj Group companies.In the recent con-call, Mr. Sumit Malhotra – Director, Sales and marketing, put forwardcompany’s perspective on the above issues, which is as below:Before we move on I must address the concern aired by a few industry observers that is use of cash reserves available with Bajaj Corp Ltd. Let me categorically assure all the investors that the cash will be used to grow Bajaj Corp. and will not be used to fund any sister concern within the Bajaj Group. A part of the cash generated through operations will be used to pay dividends.In the financial year 10–11 we disbursed one-third of our PAT as dividends, last year this ratio wasraised, and 50% of our PAT was disbursed to our investors. We shall try and maintain a handsome dividend policy in future also.In the recent past there has been another concern that is regarding the property that was purchased last year. I would like to put on record that Bajaj Corp is an FMCG company and not a real estate developer. This land was purchased and is being used for constructing our corporate head office. The reason for building the corporate office is that currently all our departments are in different cities. Even though I sit in Mumbai, my finance accounts sits in Udaipur, and my HR and SalesHead sits in Noida, and my Secretary department sits in Nariman Point. Now as we keep growing,we have to centralize the important departments that I have just listed out. So this corporate officeis basically to get everyone into a central location and be ready for the growth that we are going to envisage in the future.We believe, there could have been no better way to iron out doubts/concerns raised byanalysts regarding usage of surplus cash with the company.
  28. 28. Risks & ConcernsAt the moment, Bajaj Corp derives 94% of its revenue from the sales of Bajaj Almonddrops and thus largely dependent on one product for its growth. Beyond a certain marketshare, it won’t be possible for the company to maintain the same growth rate as itachieved in the past and thus widening of product portfolio and establishing equallystrong brands is imminent for the long term growth prospects of the company.Bajaj Corp raised around Rs 270 crore (net of issue expenses) from its initial public offeringin 2010. Further, the company has been generating close to Rs 100 crore cash fromoperations. In case the company isn’t able to find any apt acquisition target and unable toclose the deal, the returns on mounting cash surplus with the company will continue to be8-9%.At the same time, it’s important that the company does not rush into acquiring anycompany/brand/product because at the moment the valuations being commanded byFMCG companies are very high.
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