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

Bajaj Corp Ltd (NSE Code: BAJAJCORP) – Alpha/Alpha + stock
recommendation for Jul’12

www.katalystwealth.com

Content Index

1. Investment Snapshot

2. Bajaj Corp Ltd – An Introduction

3. Hair Oil Industry

4. Bajaj Corp Ltd – Details

5. Bajaj Almond Drops Hair Oil – Details

6. Bajaj Kailash Parbat Cooling Oil – Details

7. Brand building

8. Performance Snapshot

9. Operating Efficiency

10. Shareholding Pattern

11. Dividend Policy

12. Valuations

13. Corporate Governance issues and some clarifications

14. Risks & Concerns


Dear Members,

Bajaj is a name used across a whole set of products ranging from Two-wheelers to sugar
and yes there’s “Bajaj Almond Drops oil” too.

We believe, most of the members would have at some point of time used “Bajaj Almond
drops 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 with
the following codes (NSE – BAJAJCORP; BSE – 533229), though a relatively new listing
dating back to 18th Aug’10.

So, let’s get down to the details and assess the brand equity and investment worthiness of
the company:

Bajaj Corp Ltd (NSE Code – BAJAJCORP) is the second largest company in the Shishir
Bajaj Group of companies (known for Bajaj Hindustan). The history of Bajaj Corp dates
back to 1953 when Mr. Kamalnayan Bajaj 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, it transferred its operating business and assigned the trademarks
for 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 Bajaj
Corp, 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.


Investment Snapshot (As on 21st Jul’12)

Recommendation – Buy

Portfolio 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-
110

Profit Booking – Refer Alpha/Alpha + weekly

BSE Code – 533229; NSE Code – BAJAJCORP

Bloomberg Code – BJCOR: IN

Market capitalization – Rs 1,915 cr.

Total Equity shares – 14.75 cr.

Face Value – Rs 1.00

52 Weeks High/Low – Rs 145/ Rs 95.10

Promoter’s holding – 84.75%


Bajaj Corp Ltd – An Introduction

Bajaj Corp is the second largest company in the Shishir Bajaj Group of companies (known
for Bajaj Hindustan). The history of Bajaj Corp dates back to 1953 when Mr Kamalnayan
Bajaj 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, it
transferred its operating business and assigned the trademarks for 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 Bajaj Corp, BCCL assigned the
trademarks for the products in favour of Bajaj Corp. The exclusive agreement is valid for a
term 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 now
become India's third largest producer of hair oils and the largest producer of Light hair
oils (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 the
company is Bajaj Almond Drops, while it also markets other hair oil brands such as Bajaj
Brahmi Amla, Bajaj Amla Shikakai and Bajaj Jasmine Hair Oil. Off-late, one can also see
commercials of “Bajaj Kailash Parbat Cooling Oil” and as per the management they are
going to promote it aggressively.

Over the years, Bajaj Corp has carved out a niche category of Almond hair oil in the LHO
segment and the same has helped the company grow at a much faster pace than the
overall market and command a leadership position in the light hair oil segment with
50.9% share in terms of volume and 54% share in terms of value. For FY 12 Almond Drops
oil 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 in
which the company operates.


Hair Oil Industry

There are very few product categories left where home-bred Indian companies still hold
sway. Multinational corporations lord over most of the segments. One exception is that of
hair 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 that
hair 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 market
in 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 organized
Hair oil industry. It does not account for unorganized and unbranded products and
therefore the actual size of the industry would be slightly higher than what is illustrated
above.


As can be observed above, Hair oil industry can broadly be divided into Coconut Based
Oils 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%, however
over the years it’s been losing market share to other categories such as LHO and CO with
consumers 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 once
they move up the income chain, look at its annual growth; 12.5% CAGR in terms of
volume and 19.8% CAGR in terms of value.


What about Light Hair oil segment? During the last 5 years organized hair oil industry
recorded a growth of 12.5% on annualized basis in terms of volume and 19.8% in terms of
value. While during the same period, LHO segment recorded a much higher growth of
17.4% 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 volume
growth 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 the
overwhelming 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 oils

Cooling 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 CAGR
of this category has been 20% over the last 5 years and around 16.5% over the last 3 years.


The above mentioned two segments i.e. Light Hair Oil and Cooling Oil are significant
from the point of view of analyzing Bajaj Corp Ltd. as the company’s product portfolio
comprises of Bajaj Almond Drops hair oil and Bajaj Kailash Parbat cooling oil which
belong to Light Hair oil and cooling oil segment respectively.

Bajaj Corp Ltd – Details

Bajaj Corp – Product portfolio
Product Category Competitors Comments
Bajaj 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.


Besides the competitors mentioned in the above chart, the biggest competitor for Bajaj
Corp is Marico which is the largest player in the hair oil segment and dominates the hair
oil 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% contribution
towards the revenue of the company.

The newly launched Kailash Parbat Cooling Oil (KPCO) is the second largest contributor
with ~4% contribution, while the contribution from the other brands is minuscule and they
have been losing market share in their respective segments gradually.

Bajaj Almond Drops Hair Oil – Details

Launched in 1989, Bajaj Almond Drops is the key brand of Bajaj Corp Ltd and is the
leading brand in the light hair oil category. It is also one of the most premium hair oil
brands in India (illustrated later in the report).

As per the Nielsen audit report Bajaj Almond Drops is the fastest growing brand in the
hair oil category; growing in double digits year-on-year. It is already the largest brand in
the light hair oil category and currently accounts for more than 50% of this market. Being


light, non-sticky, it is believed to provide the traditional do-good benefits of nourishment
without 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 company
must find acceptance amongst the customers and then it entirely depends on the company
as to how aggressively it advertizes and promotes the products and establishes the
distribution network.

As far as acceptability of Bajaj Almond drops is concerned, based on the randomly chosen
reviews and comments available on the net, it seems the product is being liked for it being
light, non-sticky and for its application on face and body besides the regular usage on
Hair. At the same time, some consumers have their reservation against the strong
fragrance of the oil. However, on overall basis the reviews and comments were in general
positive. {Here it is important to note that in general one does not bother to write good
comments about any product, service on various forums on internet. The comments and
reviews 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 product
and as far as Bajaj Almond drops is concerned, the brand has performed remarkably well
notwithstanding the base effect.


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 much
faster than all the other players, as can be easily understood from the below two
illustrations depicting industry growth:

How well does the brand Bajaj Almond Drops deals with inflation? Warren Buffett once
said that, “Great business can overcome inflation”. How? According to Buffet, a great
business exhibits the ability to hike prices readily and easily without necessarily
fearing losing market share or unit volume.

Hike prices readily and easily – As far as Bajaj Almond drops is concerned, it’s brand
equity has enabled the company to benefit from the inflationary environment and thus
grow its Sales and profits both on account of volume and price expansion, as the company
has been able to consistently increase the prices of its products and thus pass on the hike
in the prices of raw materials and the overall operating cost.


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 has
been 35.9% CAGR. Thus, company has been steadily increasing the prices of Bajaj Almond
drops 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 reported
much better margins on account of 8.6% hike in the MRP of Bajaj Almond Drops during
Jun’12 quarter:

What we normally try and do is we try and anticipate beside the raw and packaging materials are
moving and then take a price hike which is a little more than what is required to maintain the gross
margins. This time what happened was that LLP which is the major part of our cost close to 40% of
our 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 great
business as defined by Warren Buffett, it exhibits the ability to hike prices readily and
easily without necessarily fearing losing market share or unit volume

Well, we have already noticed that Bajaj Corp has been able to steadily increase its prices
while still growing its volume at 15-20% year on year, however it’s important to find out if
the company increased the prices at the cost of market share or not?


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 is
slightly 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 other
hair oil brands in the Light hair oil segment.


Pricey, yet finding strong legs in rural areas – As illustrated above, Bajaj Almond drops is
relatively pricey in comparison to other brands and thus continues to be an urban
dominated brand.

However, there is no doubt about the fact that there lies immense potential for Bajaj
Corp’s products in rural India which accounts for 72% of the Indian population and a
large share of unbranded hair oil sales.

With the implementation of various Rural Income promotion schemes, the disposable
income is increasing in the hands of rural India and the brands with good penetration and
low 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 made
available Bajaj Almond Drops in sachets and other low unit selling price packs. Sachets
and 20 ml packs were launched by the company as early as 2004-05, and Almond Drops is
still 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 doubled
since 2008-09 and this can be directly attributed to the fast paced sales volume growth in
rural areas of India.

Consider this: For FY 12, approximately 36.3% of the sales of Bajaj Almond drops can be
attributed to rural India as compared to the fact that just 30% of its sales came from rural
India in FY 09.


Further, it’s interesting to note here that Bajaj Almond drops has slightly higher market
share in the Light Hair oil segment in rural areas as compared to urban areas of different
states. This can probably be attributed to the fact that other major players in the Light hair
oil segment have still not made their brands available in sachets.

Distribution Network – For any FMCG company, advertisement, sales and promotion
and 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 at
the point of sales is important for the consumers to be able to try the product for the first
time. Thereafter, the shelf space occupied by the product, buying pattern of other
consumers and obviously the product quality play an important role in establishing the
brand equity.


A product that is widely and easily available is likely to catch more eyeballs and thereby
gain a share of consumer’s mind space. It is easy to understand that how the above points
act as a positive feedback loop for any well established brand, act as a sustainable moat
and creates a vicious circle for the product/brand to outgrow competition.

The second most important advantage of a wide distribution network is that company can
tap the same to launch new products. For a well established brand with a distribution
network already in place, it’s far more easy to launch a new product and make it
successful than in comparison with the company which is starting fresh. This probably
explains the reason behind the wide product portfolio of well established FMCG
companies.

As far as Bajaj Corp is concerned, over the years the company has been able to set up a
formidable distribution network on pan India basis with its flagship product “Bajaj
Almond 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 distribution
network by 88,000 retail outlets.


In Hair oil industry, Marico and Dabur are the only two companies that have a larger
distribution 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 Parachute
oil is sold in ~40 lakh retail outlets in India. Though, considering the pace of growth and
the way the company has been expanding in rural areas, Bajaj Almond drops should soon
be 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 upcoming
product of the company, Bajaj Kailash Parbat Cooling Oil, launched just a year back in
May’11.

Bajaj Kailash Parbat Cooling Oil – Details

In order to leverage on its brand equity in the Light hair oil segment and the distribution
strength of over 23 lakh retail outlets, Bajaj Corp had for long been looking at strategic
brand extension and new product launches. In line with this strategy, the company
forayed into the Rs 800 crore cooling hair oil segment with the launch of Kailash Parbat
Cooling oil in May’11.

Over the last few years cooling oil has emerged as the second fastest growing segment in
the Indian Hair oil market. The ingredients in the cooling oils cause immediate relief by
cooling the scalp and therefore the sales of the same are seasonal with maximum sales
during the March and the June quarter.


The CAGR of this category has been 20% over the last 5 years and around 16.5% for the
last 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 second
largest brand with ~28% market share is “Himgange” from a privately held company (G K
Burman Herbal India Pvt. Ltd.)

Thus, Kailash Parbat faces stiff competition; however the product has performed relatively
well and has already acquired 2.1% market share in terms of volume as at the end of
Jun’12 (launched in May’11).

We believe, since the base for the last year was extremely small it would not be prudent to
talk of growth of the product at the moment. Any reasonable measure of the growth of
Kailash 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 confident
of the prospects of the brand and are willing to put money behind advertisement, sales
and promotion and distribution cost, unlike other products in their portfolio.


Distribution Network – We discussed about the importance of distribution network in
establishing 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 already
started 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 pillars
that help drive the sales growth and thereby the market share.

Bajaj Corp has already established a wide distribution network and is fast expanding the
same with every quarter. As far as advertising and sales promotion (ASP) is concerned,


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 Snapshot

Particulars (In cr.) Q1 FY 13 FY 12 FY 11 FY 10 FY 09

Net Sales 138.24 473.32 359.44 294.92 250.27
Operating Profit 38.92 116.64 108.93 97.74 51.64
Operating Profit 28.19% 24.70% 30.37% 33.18% 20.63%
Margin (%)
Other Income 9.01 37.38 17.01 4.79 1.76
Interest 0.02 0.08 0.11 0.13 0.06
Depreciation 0.78 2.6 1.79 0.85 0.44
Profit Before Tax 47.13 151.34 124.04 101.55 52.90
Exceptional Items 0.00 0.00 18.6 0.00 0.00
Tax 9.51 31.25 20.98 17.64 5.91
Profit After Tax 37.62 120.09 84.10 83.91 46.99
Profit 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


As can be observed from the above illustration, the performance of the company has been
excellent 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 to
maintain 25% + operating profit margins while maintaining the strong growth. In case of
Bajaj Corp, material cost and advertisement and sales promotion are the two major
expenses. The other operating expenses are very small (as a % of sales) as the company
does not need an elaborate manufacturing set-up, as can also be observed from
depreciation cost.

As illustrated in the Pricing power section of Bajaj Almond Drops, Bajaj Corp has able to
increase the prices of finished products in line with the increase in prices of raw materials
and packaging cost while the advertisement and sales promotion expenses are maintained
in the range of 11-14% of net sales and therefore the company has been able to maintain
operating margins in excess of 25%.

Further, the company is debt-free and since the manufacturing facilities didn’t require
much capital investment, the entire operating profits of the company flow down as profit
before tax. The other income constitutes interest and dividends on ~ Rs 320 crore cash
surplus 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-free
zones and thus enjoys exemptions from excise duty for 10 years from the fiscal year ended
March 31, 2009 and income taxes for the first five years followed by a concessional income
tax rate for the following five years.

However, on account of changes in the tax rate by the Government in 2010, its effective
rate of income tax stands increased from approximately 11.3% for the fiscal year ended
March 31, 2009 to approximately 17.0% now.


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 income

In the above illustration we have excluded the surplus cash and the liquid investments in
fixed deposits and mutual funds to determine the capital being employed in the core
business 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 to
the returns being generated. Even the fixed assets at the end of FY 12 include ~Rs 15 crore
spent on guest houses.

The working capital requirement has been negative, i.e. the company gets advance
payment from its distributors (debtors) while it enjoys a certain credit period from its
suppliers and thus also explains the operating cash flows being generated by the company
year after year. It reflects the kind of product pull enjoyed by great brands.

Shareholding Pattern

Jun’12 Mar’12 Dec’11 Sep’11 Jun’11
Promoter 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


The promoters hold 84.75% stake in the company and therefore they will have to bring
down 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 the
promoters can sell their shares in the secondary market.

In the recent con-call the management clearly indicated that equity dilution will only be
considered if the company is able to close in any acquisition deal and thereby needs
additional 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 of
minority shareholders.

Dividend Policy

At the moment, it would be too early to speak of any dividend policy since it’s only been
two years since the company got listed.

For FY 11, the company paid around 1/3rd of net profits as dividend. Similarly, for FY 12
the company paid a dividend of Rs 4/- per share which amounted to ~50% of the net profit
of the company for FY 12. However, the management has clearly indicated that future
dividend payouts would depend on the funds requirement for inorganic growth.


Valuations

By now we know that the company is very much worthy of investment (high dependence
on 1 product being a major risk, though company has already launched a new product
and targeting niche brands which can benefit from Bajaj Corp’s strong distribution


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’s
a 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 very
low on capital intensity, negative working capital requirement, backed by a good brand
and consistently recording growth to the tune of 30%.

At the current stock price, the market is valuing the operating business of the company at
Rs 1570 crore. In FY12, the company delivered a pre-tax operating cash flow of Rs 120
crore. Given the trajectory of growth at which the company’s business happens to be, this
valuation 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 business
was a AAA bond, and it paid Rs 120 crore a year in perpetuity, then the value of this non
growing perpetuity alone, at present interest rates would be Rs 1330 crore. One can
therefore see that of the total market value of Rs 1570 crore, Rs 1330 crore relates to the
present value of future earnings if they were to not grow from here. The balance Rs 240
crore relates to the growth component of value.

In other words, at its current market value, the market expects Bajaj to grow its earnings at
only 1.35% p.a. over the long term, though; to us it seems that Bajaj Corp will continue to
grow 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, however
10-15% correction from current levels will make the stock extremely attractive for long
term investment.

Corporate Governance issues and some clarifications

In the past, there were concerns raised by some analysts regarding non-appropriate use of
cash reserves with the company. First, the company bought a piece of land for Rs 75 crore


for setting up administrative office and re-locating different administrative units at the
same place. Then, there were concerns raised that since the company is generating so
much cash, it may transfer funds to other Bajaj Group companies.

In the recent con-call, Mr. Sumit Malhotra – Director, Sales and marketing, put forward
company’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 was
raised, 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 Sales
Head 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 office
is 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 by
analysts regarding usage of surplus cash with the company.


Risks & Concerns

At the moment, Bajaj Corp derives 94% of its revenue from the sales of Bajaj Almond
drops and thus largely dependent on one product for its growth. Beyond a certain market
share, it won’t be possible for the company to maintain the same growth rate as it
achieved in the past and thus widening of product portfolio and establishing equally
strong 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 offering
in 2010. Further, the company has been generating close to Rs 100 crore cash from
operations. In case the company isn’t able to find any apt acquisition target and unable to
close the deal, the returns on mounting cash surplus with the company will continue to be
8-9%.

At the same time, it’s important that the company does not rush into acquiring any
company/brand/product because at the moment the valuations being commanded by
FMCG companies are very high.


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

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