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A C Choksi
Share Brokers Private Limited

INITIATION REPORT | BAJAJ CORP LTD.

Sector:FMCG Recommendation:BUY TargetPrice:Rs.148.13 RecommendationPrice:Rs.123.65
Sept 09, 2011
BAJAJ CORP LTD.

Conversion and increasing penetration will drive growth
Swati Gupta Senior Analyst Tel: 91-22-6159 5146 Email: swati@acchoksi.com

A C Choksi Institutional Research 1
A C Choksi
Sept 09, 2011
Recommendation: BUY
Target Price (Rs.) Recommendation Price (Rs.) Potential Return (%) BSE Sensex Key Financials Shares Outstanding (mn) Face Value (Rs.) Market Capital (Rs. bn) Free Float (Rs. bn) Dividend Yield (%) Stock Data BSE Code NSE Code Bloomberg Reuters Code 52-Week Range (Rs.)
th
Investment Summary:
148.1 123.7 19.8% 16866.97
Almond Drops- Market leader in LHO Category:

Bajaj Corp is the market leader in the LHO category in India through its flagship brand Bajaj Almond Drops Hair Oil (ADHO). Almond hair oil category witnessed 29% CAGR by volume and 37.5% CAGR by value over FY07-FY11. ADHO commands dominant market share in LHO category. Its market share by value improved from 40.3% during FY08 to 54.2% during Q1FY12. The company is targeting 60-65% market share over the next 3-4 years.
147.5 1 18.57 3.68 1.5%
Strong volume growth of Almond hair oil:

During Q1FY12, ADHO had achieved a dominant market share (volume) of 50.4% in LHO category as compared to 38.4% in FY08. With rising disposable income, consumers tend to up-trade and ADHO emerged as a key beneficiary of changing consumer preferences.
533299 BAJAJCORP BJCOR IN BACO.BO 151.50/73.30
Pricing Power and Premium Margins:

Bajaj Corp has created a niche for itself which enables it to command premium prices as compared to its peers. The company has successfully increased its prices at 7 year CAGR of 6.4%, without hampering volume growth. The company commands one of the highest EBITDA margins in the industry. We believe that ADHO will continue to maintain premium pricing going forward due to strong brand equity and niche category positioning.
Share Holding Pattern 30 June 2011

DII,4% FII,5% Others,6 %
Promoter, 85%
Conversion and strong distribution network to drive growth:

ADHO is gaining market share at the expense of its peers. Going forward, it is expected to derive conversion from unbranded oils, coconut oil and amla oil. Further, Bajaj Corp is rapidly expanding its distribution reach as reaches urban and rural consumers through 2.02 mn retail outlets serviced by 5690 direct distributors and 10,085 wholesalers. Going forward, the company is likely to continue its thrust to strengthen its distribution reach to expand its market share in LHO category.
Valuation:
We Initiate coverage on Bajaj Corp for 12-18 month horizon, with a target price of Rs. 148.13 per share based on DCF valuation method. Our DCF-based target price implies an earnings multiple of 14.55x FY13 earnings. This multiple is at significant discount as compared to its peers, which factors in the risk of it being a single product company.
A C Choksi Institutional Research
A C Choksi
Sept 09, 2011
Company Background:
Bajaj Corp Ltd. (BCL), a leading producer of hair oils in India is a part of Shishir Bajaj Group of Companies. It was incorporated as Bhaumik Agro Products Private Limited on April 25, 2006. The name of the company was changed to Bajaj Corp Pvt. Ltd. Thereafter, the company was converted into public limited company in 2007 and the name changed to Bajaj Corp Ltd. The company commenced its business in April 2008. However, the products have been in existence since 1953 and were sold by different Bajaj group companies. Bajaj Corp Ltd is one of the leading FMCG Company in India with brands in Hair care category. The brands have a track record of eight decades and the company is a part of one of the oldest business houses of the country. Bajaj Corp is promoted by Shishir Bajaj Group of companies. Mr. Kushagra Nayan Bajaj is the chairman of the company. The company has a strong brand loyalty across the spectrum of Hair Oil category.
Business Overview:
The legacy of BCLs products extends back to 1953 when Mr. Kamal Nayan Bajaj established Bajaj Sevahram (BSL) to market and sell hair oils and other beauty products. In 2001, in view of the impending Bajaj family settlement, the business was demerged to to form Bajaj Consumer Care Ltd (BCCL) in 2001 when BSL transferred its operating business and assigned all trademarks to BCCL. Subsequently, BCCL licensed these brands to BCL, pursuant to the Trademark License Agreement for a period of 99 years in 2008. As per the agreement, BCL will pay Royalty @ 1% of annual net sales turnover to BCCL. The company began operating as Bajaj Corp Ltd in April 2008. The company has since become India's third largest producer of hair oils and the largest producer of light hair oils, capturing an estimated 54.2% of the light hair oil market (based on value) in Q1FY12, according to Nielsen Retail Audit Report. The companys key product is Bajaj Almond Drops Hair Oil (ADHO), a premium brand that is currently the market leader in the light hair oil segment. In addition, the company also markets other hair oil brands viz., Brahmi Amla Hair Oil (BAHO), Amla Shikakai (ASHO) and Jasmine Hair Oil (JHO). The company also produces oral care products under the brand name Bajaj Black Tooth Powder (BTP). During Q1FY12, Bajaj Corp forayed into cooling oil category with Kailash Parbat Cooling Oil (KPCO).
A C Choksi
Sept 09, 2011
Sales Break-up in Q1FY12 by Brand

JHO0.36% ASHO0.44%
BAHO2.29%
ADHO91.56%
Other8.53% KPCO5.08%
BTP 0.36%
Source: Company
Manufacturing Facilities Company Operated Parwanoo, Himachal Pradesh Dehradun, Uttar Pradeh Paonta Sahib, Himachal Pradesh Installed Capacity Total Production in FY11 Capacity Utilization
Owned/Leased
Products
Excise Duty Exemption
Income Tax Exemption
Leased Owned Owned 77.00 mn Ltrs 11.02 mn Ltrs 14.3%
ADHO, ASHO ADHO ADHO
Starting from FY10, for 10 years Starting from FY11, for 10 years Starting from FY11, for 10 years
100% for 5 years, 30% for following 5 years 100% for 5 years, 30% for following 5 years 100% for 5 years, 30% for following 5 years
Third Party Parwanoo, Himachal Pradesh Udaipur, Rajasthan Source: Company ADHO, BAHO & JHO BTP Starting from FY04, for 10 years NA NA NA
A C Choksi
Sept 09, 2011
Key Management Details:

Mr Kushagra Bajaj: Non Executive Chairman and one of the promoters of the company. He has 10 years of experience in the consumer & sugar industry and holds directorship other Bajaj group companies including Bajaj Hindusthan Ltd. Equity Research Team 022 6159 5146 Mr. Roshan F. Hinger: Vice Chairman and Whole time director of the company with research@acchoksi.com over 45 years of experience in FMCG business.
Mr Sumit Malhotra: Whole time director of the company. He is Director of Sales and Marketing department of the company. He has 23 years of experience in FMCG sector. Mr Apoorv Bajaj: Executive President and also a promoter of the company. Mr. V.C. Nagori: Vice President Finance. He has 25 years of experience in finance, taxation, audit and legal compliance. Mr. D. K. Maloo: General Manager - Finance and company secretary. He has 22 years of experience in finance, taxation, audit and legal compliance.
A C Choksi
Sept 09, 2011
Investment Rationale:
Hair Oil Industry; growing at par with FMCG Industry Average: Hair care products contribute approximately 8% of the total FMCG market (Rs 1338.76 bn) in India (Source: A C Nielsen). Hair care industry is growing at par with overall industry average of approximately 13-14%. Shampoo and hair oils, including coconut oils, continue to be the key components of this segment. Hair oils category constitute more than 55% of the overall hair care industry in India. Hair oil category witnessed a volume growth of 16.7% CAGR from FY 2007 to FY 2011whereas it witnessed value growth of 20% CAGR over the same period. This growth is primarily attributed to the improvement in distribution network and supply chain efficiency.
Hair Care Industry Size (Value) and Structure
HairCare(Rs. 10,243cr)
HairOils(Rs. 5,326cr)
OtherHaircare products(Rs. 4,917cr)
CoconutOil (Rs.2,151cr)
PerfumedOil (Rs.3,175cr)
Source: A C Nielsen
A C Choksi
Sept 09, 2011

Overall Hair Oil Market by Value
70 60 50 40 30 20 10 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
Overall Hair Oil Market by Volume

300 250 200 150 100 50 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
mnLtr.
Source: A C Nielsen
Light Hair Oil Segment is growing faster than overall hair oil market: Light Hair Oil (LHO) category is growing faster than overall Hair oil market in India. LHO category grew at 17.6% CAGR from FY07 to FY11 in volume terms while it grew at 25.5% CAGR from FY07 to FY11 in value terms. Light Hair Oil Market by Volume
25 20
10 8
Rs.bn
Light Hair Oil Market by Value
mnLtr.
10 5 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
Rs.bn
15
6 4 2 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
Source: A C Nielsen
Thus, share of LHO category increased consistently in overall hair oil category during past few years. This steady increase in LHO share was primarily driven by an increase in realizations which signifies a structural shift in consumer preference for non-sticky hair oils for which consumers are willing to pay premium price. This shift in consumer preference is attributable to rapid urbanization, favorable demographics, increase in disposable income, better distribution network and increasing penetration of branded oils in low SKUs.
A C Choksi
Sept 09, 2011
LHO share as a % of Overall Hair oil Market (by volume and value)
Source: A C Nielsen
From the following tables we can depict that penetration of branded hair oils is increasing steadily in India owing to conversion from unbranded hair oil to branded oils. The penetration of Hair oils grew 4% during 2010 and is currently at a penetration of 88.3%. On the other hand the unbranded Hair Oils which form 41% of the Hair Oil usage has seen a decline of 3% in the year 2010. Penetration Level
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2003 UnbrandedOil 2005 BrandedOil 2006 TotalHairOil 2010 29% 35% 37% 58% 57% 87% 92% 88% 88%
84%
51% 44% 40%
47% 41%
Source: A C Nielsen A C Choksi Institutional Research 8
A C Choksi
Sept 09, 2011
Usage ratio of Branded Oil in Urban and Rural Market

80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2003 Urban(%) 2005 Rural(%) 2006 26% 30% 35% 52% 59% 61% 46% 68%
Source: A C Nielsen
Almond Drops- Market leader in fast growing LHO Category: Bajaj Corp is the market leader in the LHO category in India through its flagship brand Bajaj Almond Drops Hair Oil (ADHO). As per Nielsen data, Almond hair oil category witnessed 29% CAGR by volume and 37.5% CAGR by value over FY07FY11. ADHO commands dominant market share in LHO category. Its market share by value improved from 40.3% during FY08 to 54.2% during Q1FY12.
Almond Hair Oil (AHO) Market-Volume

12 10 8
mnLtrs
Almond Hair Oil (AHO) Market-Value

5 4
6 4 2 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
Rs.bn
3 2 1 0 FY07 FY08 FY09 FY10 FY11 Q1FY12
Source: A C Nielsen
A C Choksi
Sept 09, 2011

AHO share as a % of LHO - Value
60% 50% 40%
Rs.bn
9 8 7 6 5 4 3 2 1 0 FY07 AHO FY08 LHO FY09 FY10 FY11 60% 50% 40% 30% 20% 10% 0%
AHO share as a % of LHO - Volume

25 20
mnLtr
15 10 5 0 FY07 AHO FY08 LHO FY09 FY10 FY11
30% 20% 10% 0% AHOvolumeasa%ofLHOvolume
AHOvalueasa%ofLHOvalue
Source: A C Nielsen
Strong volume growth of Almond hair oil: During Q1FY12, ADHO had achieved a dominant market share (volume) of 50.4% in LHO category as compared to 38.4% in FY08. During the period, Almond hair oil category registered ~29% CAGR by volume far higher than LHO categorys ~18% CAGR and overall Hair oils ~17% CAGR. Heavy hair oils like coconut oil and Amla oils are growing in high single digits while LHO are growing in high teens. It is visible that ADHO gained market share at the expense of its competitors. With rising disposable income, consumers tend to up-trade and ADHO emerged as a key beneficiary of changing consumer preferences. ADHO is gaining market share from coconut hair oil, amla oils, other LHO and unbranded hair oil. Major conversion came from Maricos Parachute Coconut Oil (CNO) and Deys Keo Karpin. While Marico maintained its dominant market share in CNO category due to continuous conversion from unbranded hair oil users to branded CNO users, Deys Medicals Keo Karpin lost its dominant position in LHO segment. Keo Karpin had market share of 42% in LHO category during FY04 which declined to 19% in FY11.
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Sept 09, 2011
Premium positioning; High Realizations: ADHO is positioned as premium value-added hair oil due to its differentiation properties in terms of product (almond based) and packaging (glass bottle). The product is made from almond extracts with added Vitamin E and it is packaged in a glass-bottle instead of a PET-bottle, which helps to preserves the product properties for a longer period of time. Thus, Bajaj Corp has created a niche category of Almond Oil in LHO category which enables it to command premium prices as compared to its peers. The company has successfully increased its prices from Rs 28 for 100ml in Mar03 to Rs 46 in Apr11 (CAGR of 6.4%), without hampering volume growth. The brands strong pricing power is evident from improvement in market share (by value) from 31.4% in FY06 to 54.2% in Q1FY12. In LHO category, ADHOs closest competitors are Deys Medicals Keo Karpin with ~19% market share and Maricos Hair & Care with ~16% market share. While 100 ml SKU of Keo Karpin and Hair & Care are available at Rs. 37 and Rs. 42 respectively, ADHOs 100 ml SKU is available at Rs. 46. We believe that ADHO will continue to maintain premium pricing going forward due to strong brand equity and niche category positioning.
Premium Pricing as compared to competitors
ADHO
46
100ml
Hair& Care
42
Keo Karpin
37
10
20 Prices(Rs.)
30
40
50
Source: Company
11
A C Choksi
Sept 09, 2011
Increasing focus on rural market without diluting margins: Light hair oils are primarily considered as an urban-centric product due to its premium pricing. However, it is unlikely to ignore 70% of total population living in rural India which is willing to up-trade with the rise in disposable income. In rural India disposable incomes are rising as farmers are shifting towards cash-crops and rural employment generation schemes are already in place. With growing exposure to information and media, rural consumers are well aware of branded products and are willing to up-trade. However, there is a significant difference between consumption pattern of rural and urban consumers. While consumption in urban India can be defined as Small population-consuming a lot, rural consumption can be defined as Large population-consuming little. Thus, it is important for a company looking forward to improve its traction in rural India to launch low-priced SKUs. Bajaj Corp is increasing its penetration in rural market with ADHOs LPUs of 3 ml sachet and 20 ml which are priced at Rs. 1 and Rs. 10 respectively. Proportion of rural sales in overall revenues is increasing consistently. During FY05, 3 ml sachet contributed 0.8% of overall sales while during FY11 contribution of sachets increased to 10.4%. However, it is important to note that sachets are considered a low margin SKU due to high price sensitivity. However, Bajaj Corp happened to maintain its margins even in sachets due to cost rationalization in packaging material as sachet packaging is cheaper than glass bottle packaging. Thus, it gives Bajaj Corp an edge over its competitors who would have to dilute their margins to increase traction in rural India. As a result, Bajaj Corp has a dominant market share of ~ 57.5% in LHO category in rural market. During FY11, sachet and 20 ml SKUs registered strong growth of 63% and 49.8% respectively which reinforces the fact of fast growing presence of Bajaj Corp in rural market. Strong Growth in Low priced SKUs
300 200
ADHOSKUs(ml)
100 75 50 20
Sachet 0% 10% 20% 30% 40% 50% 60% 70%
Source: Company A C Choksi Institutional Research 12
A C Choksi
Sept 09, 2011
Sachets contribution increased consistently in overall sales

100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 0.8% FY05 Sachet 20 1.9% FY06 50 2.9% FY07 75 3.5% FY08 100 5.8% FY09 200 300 7.4% FY10 500 10.4% FY11
Source: Company
Strong Presence in North India: LHO sales are geographically concentrated specifically in the northern regions of the country due to willingness of consumers to try new products. Whereas, south India is still a major consumer of coconut oil due to its deep rooted traditional values. This can be depicted from the following chart as southern region contributes only 4% of total LHO sales while northern region contributes whopping 51%. On the other hand, contributions of eastern and western regions are almost similar at 22-23% level. Eastern region primarily uses mustard oil, amla oil, cooling oils and LHOs, while western region primarily uses coconut oil, mustard oil, groundnut oil and LHOs. Bajaj Corp has a strong presence in North, East and Western regions with its well entrenched distribution network.
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Sept 09, 2011
Region wise break up of LHO Market

South,4%
East,22%
North,51% West,23%
Source: Company
ADHOs strong position in most of the states (except southern states)

80 70 60 50 40 30 20 10 0 Delhi Haryana Assam AllIndia Punjab Chattisgarh Maharashtra Uttaranchal TamilNadu Jharkhand W.Bengal Gujarat Karnataka Rajasthan Kerala Bihar U.P. M.P. Orissa A.P.
ADHOMarketShare%(Vol)
Total
Urban
Rural
Source: Company A C Choksi Institutional Research 14
A C Choksi
Sept 09, 2011
Strong Distribution network: Bajaj Corp has established strong distribution network in past few years. It reaches urban and rural consumers through 2.02 mn retail outlets serviced by 5690 direct distributors and 10,085 wholesalers. Northern Region is the major market for LHO category. Thus, approximately 49% of Bajaj corps stockists are based in North India, which ensures high penetration of ADHO in rural and urban area in the region. Bajaj Corp is rapidly expanding its distribution reach as its stockists strength has grown from less than 1500 in FY05 to 5690 in Q1FY12. Going forward, the company is likely to continue its thrust to strengthen its distribution reach to expand its market share in LHO category. Bajaj Corp has 32 regional distribution centers which further distributes to rural and urban stockists. Approximately 80% sales are derived through dominant distribution channels: Local Grocery stores and general stores are dominant distribution channels for LHO category as approximately 79% sales occur through these channels. Approximately 80% of ADHOs sales are derived through these channels. From distribution perspective, retailers play an important role to push a brand or influence purchase of consumers. Thus, ADHO which has already become a generic name for Almond oils provides the company an edge over its competitors.
Moderate Competitive intensity: Marico, Dabur, Bajaj Corp and Emami are the leading players in branded hair oil in India. Hair oil category is unlikely to face fierce competition from MNCs as hair oils are not widely used in different geographies across the globe. Although hair oil category is highly penetrated, approximately 40% of total market is with unorganized players. Hence, with rising income levels and changing consumer preference there is a huge scope for all leading players to register healthy growth going forward. All four domestic players are market leader in their own niche. While Marico is a leading player with approximately 46% market share in branded CNO category, Dabur is leading in Amla oil category with ~70% market share. On the other hand, Emami is a dominant player in cooling oils with a market share of approximately 54.4% whereas Bajaj Corp is market leader in LHO category. Thus, all the players have stable growth coming from their flagship product whereas they are trying to gain market share in other hair oil categories.
15
A C Choksi
Sept 09, 2011
ADHOS Outlook: Volume Outlook: We believe ADHO will register 15% volume growth during FY12 driven by conversion from peers, increasing penetration in rural market and expanding distribution reach. ADHOs volume growth is primarily driven by conversion from coconut oil users, amla oil users, unbranded oil users and other LHO users. Amongst these, conversion from coconut oil users is approximately 40% whereas conversion from amla oil users is approximately 18%. During FY10, ADHO registered volume growth of 14.8% whereas during FY11 it registered a volume growth of 18.3%. It is important to note that, during FY10, ADHOs 100 ml SKU was available at 100% premium over Parachutes 100 ml SKU. Whereas during FY11 copra prices increased significantly and Marico took a price increase of ~ 35%. On the other hand, ADHO took a price increase of ~5% during the year. This resulted into a decline in premium (from 100% to 56%) charged by ADHO over Parachute CNO. This reflected in more-thanaverage increase in ADHOs volumes during FY11. However, increasing LLP (light Liquid Paraffin) prices necessitated Bajaj Corp to take further price increase and during Apr11 Bajaj Corp had taken a weighted average price increase of 8.5%. On the other hand, copra prices started stabilizing due to flush season. Thus, during current year premium of ADHO over Parachute widened to ~70%. As per our estimates, during FY12 Marico is unlikely to take any steep price increase. Bajaj Corp is also not expected to take further price increase as LLP prices are expected to correct from H2FY12. Thus, this premium of 70% is expected to remain stable during the year. Local Grocery stores and general stores are dominant distribution channels for LHO category as approximately 79% sales occur through these channels. Dabur Amlas 100 ml SKU is available at Rs. 36. During FY10 and FY11, ADHOs 100 ml SKU commanded a premium of 18% and 17% respectively over Dabur Amlas 100 ml SKU. However, during Q1FY12 this premium increased to 28% as ADHO had taken price increase of ~8.5% during Apr11. During Q1FY12, Army which is one of the largest customers of Amla oil had downscaled business due to overall tightening up mandate by the government. Thus, volumes of Dabur Amla oil are likely to get hampered during FY12 which will deter Dabur to take further price increase during the year. Thus, premium of ADHO over CNO and Amla oil widened during Q1FY12 as compared to FY11. Hence, we can conclude that ADHOs volume growth will remain at normalized level of 15% during FY12.
A C Choksi
Sept 09, 2011
Realizations Outlook: We have factored in 10% and 6% increase in realizations during FY12 and FY13 respectively. Bajaj Corp had already taken a weighted average price increase of 8.5% during Apr11. As LLP prices are likely to correct from Q3FY12, we dont anticipate any significant price increase during FY12.
Raw Materials Outlook: LLP, glass bottles and refined oil are major raw material for Bajaj Corp. LLP: LLP constitutes approximately 40-42% of total raw material cost of ADHO. During FY11, LLP cost registered a sharp increase of 49.5% due to high crude prices. We have factored in an increase of 28.2% in LLP prices during FY12. Further, as per our estimates LLP prices are expected to correct by 5.2 % during FY13. LLP (Rs./Kg)
90 80 70 60 50 40 30
Source: Company, A C Choksi Institutional Research
17
A C Choksi
Sept 09, 2011
Glass: Glass bottles constitute approximately 25-26% of total raw material cost of ADHO. We have factored in an increase of 17% during FY12 driven by an increase in soda ash prices. Major supplier for Bajaj Corps glass bottles, has already taken price increases during Q1FY12 and it is unlikely to take further price increase during the year unless there is an abnormal increase in soda ash prices. Glass Index
145 140 135 130 125 120 115 110 105 100 Apr05 Apr06 Apr07 Apr08 GlassIndex Apr09 Apr10 Apr11
Soda Ash (Rs./Kg)

32 30 28 26 24 22 20 18 16 14 12 10
SodaAsh(Rs./Kg)
Source: Company, A C Choksi Institutional Research A C Choksi Institutional Research 18
A C Choksi
Sept 09, 2011
Refined oil: It constitutes approximately 8% of total raw material cost of ADHO. Production of groundnut and mustard are expected to increase by 21% and 18% respectively, during the current crop season. However, due to high food inflation we have factored in an increase of 10% during FY12. Foray in emerging categories like cooling oils: Cooling oil is a fast growing category with a 5 year CAGR of ~20%. Bajaj Corp entered into this category with its Kailash Parbat Cooling oil (KPCO) brand during May11 at pan-India level. During Q1FY12, KPCO registered sales of Rs. 54.2 mn. Emami is the market leader with approximately 54.4% market share in this category with its Navratna brand. Bajaj Corp is vying to create its niche in this category by positioning its product with differentiation factor. KPCO has extract of sandal which is known for its cooling properties and the product has different colour and fragrance as compared to other products available in this category. Bajaj Corp has a strong distribution network to achieve pan-India scale for a new product at a faster pace. The product is gaining rapid traction in states like Punjab, Madhya Pradesh, Rajasthan and Gujarat where Bajaj Corp has a very strong distribution network. In cooling oil category, it primarily competes with Emami which has a smaller distribution network as compared to Bajaj Corp. There is a regional brand Himgange which has the second highest market share of ~25%. This brand is focused in U.P., Bihar, Chhattisgarh and Jharkhand. Marico is also prototyping its cooling oil Parachute Advansed Coconut Cooling Oil in Andhra Pradesh and is likely to expand its reach in near term in southern region where it has a strong foothold. Thus, we believe that strong distribution network and product differentiation will aid Bajaj Corp to gain traction and create its niche in this fast growing category. Shrinking investment behind under-performing categories: Bajaj Corp has presence in Amla oil category with its Bajaj Brahmi Amla Hair Oil (BAHO) and Bajaj Amla Shikakai Hair Oil (ASHO). Dabur is the market leader in Amla oil category with approximately 70% market share. However, despite of substantial advertisement and promotional spend these products were unable to get significant market share due to the lack of product differentiation. Thus, the company is unlikely to invest behind these products unless it finds a differentiation factor. Their contribution in sales and sales in absolute terms is declining consistently. Thus, we have factored in a decline of 16.0% in BAHO sales and 20.8% decline in ASHO sales during FY12.
19
A C Choksi
Sept 09, 2011

BAHO Sales Value
500 400
BAHO's Contribution to sales (%)

5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% FY10 H1FY11 FY11 Q1FY12 BAHO'sContributiontosales(%)
Rs.mn.
300 200 100 0 Q1
Q2 FY11
Q3 FY10
Q4
ASHO's Contribution to sales (%)

2.00% 1.50% 1.00% 0.50% 0.00% FY10 H1FY11 FY11 Q1FY12
ASHO Sales Value

200 150
Rs.mn
100 50 0 Q1 Q2 FY11 Q3 FY10 Q4
ASHO'sContributiontosales(%)
20
A C Choksi
Sept 09, 2011
Financial Projections:
Revenue to grow at 2-year CAGR of 21.3% by FY13: We expect market share of ADHO to increase going forward driven by its strong brand positioning, conversion from loose oils/coconut oil/amla oil users to ADHO and wider and deeper distribution network. Further, KPCO is expected to garner healthy traction in cooling oil category due to its product differentiation properties. In addition, Bajaj Corp is exploring options to extend its brand into high growth and high margin hair care and/or personal care categories to capitalize upon its brand equity and for optimum utilization of its wide spread distribution network. The company has sufficient cash, raised through IPO, to fund any inorganic or organic growth plans. Foray into cooling oil category and expansion in other categories will reduce its dependence on its core product ADHO. Hence, we believe Bajaj Corp is well on track for a steady revenue growth momentum. Going forward, overall revenues of the company are expected to grow at 2-year CAGR of 21.3% by FY13. Revenue & Revenue Growth
6000 5000 4000 3000 2000 1000 0 FY10 FY11 TotalSales FY12E SalesGrowth FY13E 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
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A C Choksi
Sept 09, 2011
Operating profit to witness healthy growth: Bajaj Corps operating margin is expected to grow at 2-year CAGR of 16.8% till FY13. However, during Q1FY12, raw material inflation remained intact. Further, during the quarter Bajaj Corp had launched KPCO which increased its A&P expenditure during the quarter. These factors will have dilutive impact on operating margin of the company during the year. Thus, we expect operating margins to contract by 351 bps yo-y during FY12. However, Management expects KPCO to achieve break even during second year of the launch with approximately 6% market share. Further, we expect a decline in LLP cost during FY13. This will result into margin expansion by 129 bps during FY13 as compared to FY12. EBITDA (Rs. Mn) & EBITDA Margin
1600.0 1400.0 1200.0 1000.0 800.0 600.0 400.0 200.0 0.0 FY10 FY11 EBITDA FY12E EBITDAMargin FY13E 15.0% 10.0% 5.0% 0.0% 35.0% 30.0% 25.0% 20.0%
Strong growth in net profit: We expect net profit to grow at 20.7% 2-year CAGR by FY13. We have factored in tax rate of 20% during FY12 and FY13. Despite of high tax rate as compared to FY11 and margin contraction at operating level, net margin is expected to contract by just 117 bps during FY12, primarily due to an increase in other income. During FY13, PAT margin is expected to expand by 86 bps.
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A C Choksi
Sept 09, 2011

PAT (Rs. Mn) & PAT Margin
1600 1400 1200 1000 800 600 400 200 0 FY10 FY11 AdjustedPAT FY12E NetMargin FY13E
29.0% 28.8% 28.6% 28.4% 28.2% 28.0% 27.8% 27.6% 27.4% 27.2% 27.0% 26.8%
Negative Working Capital Cycle: Bajaj Corp has a policy to sell in cash. Thus, its trade account receivable days were as low as 6.14 during FY11. This resulted into negative working capital cycle during the year. Going forward, we believe that the company will maintain its strong receivable policy. Further, inventory days are expected to decline from FY13, as exceptionally high raw material cost scenario seems to be over which will lead to a decline in raw material position building. Thus, we expect that the company will continue to maintain negative working capital cycle going forward. Cash rich business model; capable to fund capex through internal accruals: During FY10, Bajaj Corp had raised Rs. 2,970 mn through IPO. Out of this, the company had allocated Rs. 2200 mn for promotion of new products and Rs. 500 mn for acquisitions and strategic activities. In the recent past, acquisitions deals commanded high valuations in FMCG space. Thus, we believe that Bajaj Corp is scouting for a regional brand which it will scale up at pan-India level leveraging on its wide-spread distribution network. The company generates healthy cash flow at operational level; it generated Rs 1,014.6 mn for FY11 and will continue to generate healthy cash flows in future on account of negative working capital cycle. We have factored in a maintenance capex of Rs. 150 mn and Rs. 180 mn during FY12 and FY13 in our estimates.
A C Choksi
Valuation:
Sept 09, 2011
DCF-Valuation
Particulars (Rs. Mn) FY 2011A
In our DCF model we have derived explicit free cash flow projections till FY 2020 after which we have assumed a terminal value. Based on a WACC of 10.90% and a perpetual growth rate of 5% we arrive at a DCF fair value of Rs. 148.13 for Bajaj Corp. We initiate the coverage on the stock with BUY recommendation with potential upside of 19.8%.
FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E
Net revenues EBIT EBIT margin Net income (Adjusted) Free Cash Flow (FCF) analysis NOPLAT Depreciation Change in working capital Capex Free cash flow Discounted Free Cash Flow Perpetual growth rate WACC Terminal Value Discounted Terminal Value
3,587 1,063 29.6% 1,031
4,475 1,164 26.0% 1,234
5,282 1,435 27.2% 1,502
6,074 1,680 27.7% 1,719
6,985 1,929 27.6% 1,844
7,963 2,117 26.6% 1,982
8,998 2,388 26.5% 2,210
10,078 2,570 25.5% 2,371
11,186 2,848 25.5% 2,606
12,305 3,066 24.9% 2,500
855 28 (212) (150) 945 8,001 5.00% 10.90% 31,622 13,035 (813) Net Debt 147.5 Outstanding shares (mn) Fair Value per share (Rs.) 148.13 Source: Company, A C Choksi Institutional Research
853 18 (455) (62) 1,264
1,059 39 (149) (180) 1,067
1,250 51 (156) (207) 1,250
1,347 61 (170) (237) 1,341
1,456 73 (184) (271) 1,442
1,652 86 (196) (306) 1,628
1,779 101 (207) (343) 1,744
1,979 116 (214) (380) 1,929
1,835 133 (218) (409) 1,777
DCF sensitivity analysis 148.13 9.90% 10.40% WACC 10.90% 11.40% 11.90% 3.00% 142.1 132.7 124.5 117.3 110.9 Terminal growth rate 4.00% 5.00% 6.00% 156.6 177.0 207.9 144.7 161.2 185.2 134.6 148.1 167.2 125.8 137.1 152.5 118.2 127.6 140.3 7.00% 260.0 223.3 196.0 174.9 158.1
Source: A C Choksi Institutional Research

A C Choksi
Sept 09, 2011
Investment Concerns:
Single Product Concentration: ADHO contributes approximately 92% of overall sales. Although, ADHO enjoys pricing power due to its dominant market share in LHO category any unhealthy competitive activity can hamper its market share and/or premium margins. However, the company is in the process of reducing this risk by diversifying its product portfolio through new product launches. Volatility in raw material prices: LLP, glass bottles and vegetable oils are major raw material for Bajaj Corp. For LLP requirement, the company enters into future contracts while glass bottles and vegetable oils are purchased at spot prices. During FY11, raw material prices increased significantly and continue to move up till Q1FY12. The company had already taken price increase to mitigate the impact of input cost inflation. However, if raw material prices increases more than our estimates, it may adversely affect Bajaj Corp by either affecting margins or volumes. This will lead to deviation from our estimates. Unsuccessful new product launches: The company is in the process of launching new products. However, any unsuccessful launch will impact profitability of the company and will burn its cash reserves. Along with that, it can also hamper brand equity of the company. Risk related to acquisitions: The company is on a look out for acquisition. However, Bajaj Corp is keeping a conservative stance to fund these acquisitions (largely through internal accruals). Recent acquisition deals in FMCG space happened at exorbitant valuations. Thus, it will be tough to identify a strong regional player at reasonable valuations. Further, after a successful acquisition, the company runs a risk of being unable to create market for a regional brand at national level. Slowdown in consumer spending: During macro-economic slowdown and rising inflation consumers tend to reduce spending by down trading. Considering Bajaj Corps premium priced flagship product, a slowdown in consumer spending would be a risk to our earnings estimates and target price as consumers tend to down-trade in such a scenario. Low Float: Bajaj Consumer Care Ltd. Holds 84.75% stake in Bajaj Corp. Thus, Bajaj Corp has low liquidity which makes stock vulnerable to steep downward movement in case of unfavorable news. However, as per new SEBI guidelines, promoters need to gradually reduce their holding to 75% or below, over a period of time. This mandate will address the low liquidity concern in the stock.
25
A C Choksi
Sept 09, 2011
FINANCIALS:
INCOME STATEMENT
Particulars (Rs. Mn) Total Revenues (Net of Excise) Cost of goods sold Gross profit Gross profit Margin FY10A 2,946 1,177 1,769 60.0% FY11A 3,587 1,585 2,002 55.8% FY12E 4,475 2,121 2,354 52.6% FY13E 5,282 2,407 2,874 54.4%
Selling, Gen & Adm Expenses Ad. & Sales Promotion Staff Cost EBITDA EBITDA Margin Depreciation & Amortization EBIT EBIT Margin Other Income Exceptional Items Adjusted PBT
284 373 138 973 33.0% 8 964 32.7% 51 0 1,016
354 405 163 1,081 30.1% 18 1,063 29.6% 178 190 1,240
446 512 205 1,191 26.6% 28 1,164 26.0% 379 0 1,542
527 629 245 1,474 27.9% 39 1,435 27.2% 442 0 1,877
Provision for Income Taxes Reported PAT Adjusted PAT PAT Margin Diluted Weighted Average shares (mn) Diluted EPS (Rs.) Dividends Dividend Tax
176 839 839 28.5% 125 6.71 920 156
210 841 1,031 28.7% 148 6.99 280 47
308 1,234 1,234 27.6% 148 8.36 411 68
375 1,502 1,502 28.4% 148 10.18 500 83
26
A C Choksi
Sept 09, 2011
BALANCE SHEET
Particulars (Rs. Mn) Current Assets Cash and cash equivalents Trade accounts receivable Inventories Loans and Advances Total current assets Fixed Assets Gross Block Less: Accumulated Depreciation Net Block Capital WIP Intangible Assets Investments Deffered Tax assets Misc. Expenses Total non-current assets Total assets Current liabilities Sundry Creditors Advance from Customers Deposits from C&Fs and others Statutory Liabilities Other Liabilities Provisions Total current liabilities Long term debt Other long term liabilities Total long term liabilities Minority Interest Share Capital Share Premium Reserves & Surplus Total liabilities and equity
FY10A 168 29 99 25 320
FY11A 813 60 144 43 1,061
FY12E 1,660 76 198 54 1,988
FY13E 2,586 91 216 69 2,963
196 13 184 0 0 21 -1 23 227 547
247 30 217 3 0 3,301 0 1 3521 4,581
397 58 339 0 0 3,301 0 0 3640 5,628
577 97 480 0 0 3,301 0 0 3781 6,744
145 19 4 43 7 49 268 0 0 0 0 125 0 154 547
356 21 4 53 9 375 818 0 0 0 0 148 2,948 668 4,581
479 23 4 64 10 530 1,110 0 0 0 0 148 2,948 1,423 5,628
554 25 4 76 11 637 1,308 0 0 0 0 148 2,948 2,341 6,744
27
A C Choksi
Sept 09, 2011
CASH FLOW STATEMENT

Particulars (Rs. Mn) Net income (loss) before taxes Operating profit before working capital changes (Increase)/decrease in Debtors (Increase)/decrease in Inventories (Increase)/decrease in Other Loans & Advances Increase/(decrease) in Creditors Increase/(decrease) in Other liabilities Increase/(decrease) in Provisions Cash generated from operations Tax Paid Net cash from operating activities Cash flow from investing activities Capital Expenditures Capital WIP Interest Received Dividend Received (Purchase)/Sale of Investment (Net) Defferred tax liability Misc. expenses Net cash used in investing activities Cash flows from financing activities Proceeds from the issue of share capital Payment of Dividend Payment of Dividend Tax Share Issue Expenses Net Cash from financing activities Increase/Decrease in cash and cash equivalents Cash and cash equivalents at the beginning Cash and cash equivalents at the end
FY10A 1,016 976 (26) (22) 64 8 6 24 1031 (170) 861
FY11A 1,240 1,089 (29) (45) (14) 219 11 (1) 1228 (214) 1015
FY12E 1,542 1,199 (16) (53) (11) 125 12 2 1258 (308) 950
FY13E 1,877 1,481 (15) (19) (15) 77 14 3 1526 (375) 1151
(128) 0 46 0 (19) 0 0 (102)
(62) 0 113 5 (3227) 0 0 (3171)
(150) 3 324 5 42 (0) 1 224
(180) 0 396 5 34 0 0 254
0 (923) (157) (23) (1102) (343) 510 168
2970 0 0 (168) 2802 646 168 813
0 (280) (47) 0 (327) 847 813 1,660
0 (411) (68) 0 (479) 926 1,660 2,586
28
A C Choksi
Sept 09, 2011
RATIOS
Particulars (Rs. Mn) Growth (%) Total sales EBITDA Net profit EPS Per Share Earnings Dividends Book value Cash Div Yield Margins (%) Gross Margin EBITDA PAT Financial Creditor Days Debtor Days Inventory Days Dividend Payout Ratio Valuations PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ROE ROCE FY11A 21.8% 11.1% 22.8% 4.1% FY12E 24.8% 10.2% 19.7% 19.7% FY13E 18.0% 23.7% 21.7% 21.7%
6.99 1.90 25.51 5.58 1.5%
8.36 2.79 30.63 8.18 2.3%
10.18 3.39 36.85 9.92 2.8%
44.2% 30.1% 28.7%
47.4% 26.6% 27.6%
45.6% 27.9% 28.4%
82 6.1 33.2 27.2%
83 6.2 34.0 33.3%
84 6.3 32.8 33.3%
17.6 4.8 16.0 4.8 51% 51%
14.7 4.0 13.8 3.7 30% 30%
12.1 3.3 10.6 2.9 30% 30%
29
A C Choksi
Sept 09, 2011
Swati Gupta- 022 6159 5146 swati@acchoksi.com

Disclaimer
TheinformationandviewspresentedinthisreportarepreparedbyACChoksiShareBrokersPrivateLimited.Theinformationcontainedhereinisbasedon our analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personalinformationandwearenotresponsibleforanylossincurredbaseduponit.Theinvestmentsdiscussedorrecommendedinthisreportmaynotbe suitableforallinvestors.Investorsmustmaketheirowninvestmentdecisionsbasedontheirspecificinvestmentobjectivesandfinancialpositionandusing suchindependentadvice,astheybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthisreport,investorsmaypleasenotethat neither A C Choksi Share Brokers Private Limited nor any person connected with any associated companies of A C Choksi Share Brokers Private Limited acceptsanyliabilityarisingfromtheuseofthisinformationandviewsmentionedinthisdocument.Theanalystsforthisreportcertifiesthatalloftheviews expressedinthisreportaccuratelyreflecthisorherpersonalviewsaboutthesubjectcompanyorcompaniesanditsortheirsecurities,andnopartofhisor hercompensationwas,isorwillbe,directlyorindirectlyrelatedtospecificrecommendationsorviewsexpressedinthisreport.
Disclosure of Interest Analyst ownership of the stock Broking Relationship with the company covered Investment Banking relationship with the company covered Discretionary Portfolio Management Services
NO NO NO NO
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A C Choksi

Share Brokers Private Limited

Sector:FMCG Recommendation:BUY TargetPrice:Rs.148.13 RecommendationPrice:Rs.123.65

Sept 09, 2011

BAJAJ CORP LTD.

Swati Gupta Senior Analyst Tel: 91-22-6159 5146 Email: swati@acchoksi.com

Sept 09, 2011

Almond Drops- Market leader in LHO Category:

147.5 1 18.57 3.68 1.5%

Strong volume growth of Almond hair oil:

533299 BAJAJCORP BJCOR IN BACO.BO 151.50/73.30

Pricing Power and Premium Margins:

Share Holding Pattern 30 June 2011

Conversion and strong distribution network to drive growth:

A C Choksi Institutional Research

Sept 09, 2011

Sept 09, 2011

Sales Break-up in Q1FY12 by Brand

Excise Duty Exemption

Income Tax Exemption

Leased Owned Owned 77.00 mn Ltrs 11.02 mn Ltrs 14.3%

ADHO, ASHO ADHO ADHO

A C Choksi Institutional Research

Sept 09, 2011

Key Management Details:

A C Choksi Institutional Research

Sept 09, 2011

Hair Care Industry Size (Value) and Structure

OtherHaircare products(Rs. 4,917cr)

A C Choksi Institutional Research

Sept 09, 2011

Overall Hair Oil Market by Volume

Light Hair Oil Market by Value

10 5 0 FY07 FY08 FY09 FY10 FY11 Q1FY12

6 4 2 0 FY07 FY08 FY09 FY10 FY11 Q1FY12

Sept 09, 2011

51% 44% 40%

Source: A C Nielsen A C Choksi Institutional Research 8

Sept 09, 2011

Usage ratio of Branded Oil in Urban and Rural Market

Almond Hair Oil (AHO) Market-Volume

Almond Hair Oil (AHO) Market-Value

6 4 2 0 FY07 FY08 FY09 FY10 FY11 Q1FY12

3 2 1 0 FY07 FY08 FY09 FY10 FY11 Q1FY12

A C Choksi Institutional Research

Sept 09, 2011

AHO share as a % of LHO - Volume

15 10 5 0 FY07 AHO FY08 LHO FY09 FY10 FY11

30% 20% 10% 0% AHOvolumeasa%ofLHOvolume

A C Choksi Institutional Research

Sept 09, 2011

Premium Pricing as compared to competitors

A C Choksi Institutional Research

Sept 09, 2011

Sachet 0% 10% 20% 30% 40% 50% 60% 70%

Source: Company A C Choksi Institutional Research 12

Sept 09, 2011

Sachets contribution increased consistently in overall sales

A C Choksi Institutional Research

Sept 09, 2011

Region wise break up of LHO Market

ADHOs strong position in most of the states (except southern states)

Source: Company A C Choksi Institutional Research 14