Bajaj Consumer Care Q3 review: Improvement in wholesale augurs well; diversification key

Bajaj Consumer Care‘s Q3 FY19 earnings reflected a sequential improvement from Q2, which was marred by channel clearance on account of Almond Drops Hair Oil (ADHO) relaunch as well as weak offtake in rural wholesale channels. Management commentary on Q3 result sounds quite assuring on improving demand and successful execution of product re-launches.

Key positives

Operating performance was mainly led by 9.4 percent year-on-year volume growth of ADHO. The latter’s market share in light hair category has inched up to 60 percent in November 2018 compared to 58.4 percent last year, partially aided by a relaunch campaign.

Another key product for the company, No Marks’ restage has also been successful, with sharper rise in offtake, leading to an 8.6 percent market share in the anti-marks cream category (versus 7.6 percent last year). Strong hold was visible in its key market Uttar Pradesh, wherein its urban market share is about 12 percent.

Financial snapshot

Source: Company

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The management pointed out that raw material prices are seeing a softening trend and is expected to turn favourable from Q4 onwards. It keeps raw material inventory till February and hence gross margin improvement would be apparent thereafter. After witnessing weak offtake in wholesale channel towards the end of Q2, it has rebounded strongly in the quarter under review.

This suggests that rural growth is still intact for the company. This is interesting because Bajaj Consumer Care was among the few in Q2 report to caution about a possible weakness in rural demand. Among others, launch of a smaller Rs 10 pet jar pack for ADHO has been instrumental in better penetration in the hinterland.

Key negatives

Overall volume growth was seven percent, which implies weaker performance of other hair oil categories.

While other hair oil categories constitute a very small part of company’s portfolio, meaningful growth traction is awaited for products like Coco Jasmine, which has so far been at the pilot stage. Traction on Brahmi amla hair oil is not as per expectations. While international sales (three percent revenue share) growth revived, volume growth remains bleak (-2 percent YoY)

Other observations

Over the last two-and-a-half years, the company has lowered wholesale channel contribution to 33 percent from 60 percent.

While part of the impact is due to implementation of the Goods & Service Tax, the company aims to increase share of direct reach, which stands at 4.92 lakh outlets. By FY19 end, the management is targeting a reach of 5,4 lakh outlets. Canteen Stores Department (CSD) channel has been a key contributor of growth in Q3, with 4 percent revenue share and 35 percent sales growth.

However, on account of uncertainties with respect to government policy on CSD little can be said about future prospects.

Competitive intensity and limited portfolio range are key constraints

Successful relaunches of key products of the company — ADHO and No Marks — along with better rural offtake have been the salient takeaways from the result. Softening raw material prices are supportive of margin and give it headroom for brand focused campaigns. The stock has corrected 27 percent from its 52-week high and is currently trading at 21 times FY20 estimated earnings.

This makes it among the cheapest FMCG stocks available.

Given the improved business context for its existing portfolio, participation in rural growth and prevailing stock price, we have turned constructive.

But given the competitive intensity and limited diversification, we expect it to trade at discount to the median trading multiple of the FMCG sector.

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