In the last few months we are doing solid research, and today we are sharing you with a strong recommendation on Bajaj Consumer Care Ltd with a ‘100 percent Buy’ perspective. This Fast Moving Consumer Goods company has a solid dividend payouts and an almost debt-free balance sheet was valued just at 10 times its trailing 12 months price to earnings (P/E) ratio. For a sector where P/Es in the range of 50 to 70 times is just very normal, the business seems like a bargain.
But there various reasons for such a significant discount on the sector valuations. Over the last couple of years, the growth in the company’s sales and profits has been far from exceptional. This could partially be blamed on the overall slowdown in the hair oil industry and the overall economy.
What is the reason why we were so much fascinated to do research in the company was that it is not betting on just an industry or macroeconomic turnaround? It has been working on a fresh strategy with the main goal to double the market share in the hair oil category.
It has recently announced its results for the quarter ended December 2019 and the management team has shared its views on the road ahead.
Let’s take a overview with financials and earnings of Bajaj Consumer Care Ltd.
The revenue for the quarter stood at Rs 2 billion, down 8.2% YoY. Volumes during the quarter were down 8.6% Year on Year amid a slowdown in the hair oil industry, especially in the rural segment. As per the management, all the categories except low-cost amla oil witnessed a decline in sales and volumes during the quarter.
Unlike its competitors, the management has refrained from giving extra credit to distributors, which is likely to have put pressure on the volumes as well.
Value-wise, the company enjoyed a market share of 10.4% during the quarter with a household penetration of 21.2%.
The operating profit for the quarter declined 24.5% YoY, with margins at 24.9%, versus 30.2% in 3QFY19, mainly due to a rise in other expenses (advertising and promotion expenses at 21.7% of sales). Lower effective tax rate limited the bottom line decline to 17.8% YoY, with margins at 22.9%, versus 25.5% in 3QFY19.
Bajaj Consumer Care Future Growth Avenues and Opportunities
As we had referenced in the ongoing proposal report, the organization is intending to move its concentration from diversified product-based business model to its core products. It expects to twofold the piece of the pie in the hair oil industry over the next 4 years and has roped in Bain Capital to assist it with executing the technique (beginning with 2 states). According to the administration, the new methodology has demonstrated positive outcomes up until this point. What’s more, the administration will be taking it on Pan India Level throughout the following quarters.
The new technique will prompt expanded marketing, advertising and promotional costs, expanded direct appropriation and utilization of artificial intelligence and alternate channels. To represent such changes, we have considered pressure in the working net revenues in our projections and degrowth in FY20.
There have been some fascinating improvements at the administration level also. In January this year, the organization has selected Mr. Jaideep Nandi as CEO (Chief Executive Officer) who had a prior stretch at Asian Paints.
The organization remains nearly obligation free (notwithstanding some transient working capital obligation) and has conventional money parity of around Rs 4.5 billion (~15% of the current market cap). It has in the past been very strong and had a capacity of paying at least 70% of the profits as dividends and the management plans to continue the practice.
It has been now trading a fairly reasonable Valuations Amid Recent Correction. As today we are recommending the stock which is trading around 135 rupees.
At the current stock price of Rs 135, the dividend yield on the stock stands around 15%. We recommend our dear subscribers buy this stock with a target price for Rs 353 for the next 2-3 years.
According to us, in the current scenario of a recent sharp correction, you should invest in small-cap stocks not more than 10% of your overall equity portfolio. Usually, we often advise our followers that a single small-cap stock should not go beyond 5% of the total portfolio. Kindly make a note that this stock and portfolio allocation will differ from investors to investors. As part of Disclaimer policy we are just providing a detailed stock view and please consult your financial advisor before investing.