Bajaj Corp IPO analysis

Betting on single brand

92% sales come from Bajaj Almond Drops, a premium brand and market leader with value share of 50.3% in the light hair oil segment



Bajaj Corp is promoted by Bajaj Consumer Care, which in turn is promoted by Shishir Bajaj, his son Kushagra Bajaj and his wife Minakshi Bajaj. It is one of India's leading producers of light hair oils. It started operating in April 2008. Earlier, Bajaj Sevashram (BSL) sold hair oils and other beauty products. Due to the Bajaj family settlement in 2001, the business was demerged to Bajaj Consumer Care (BCCL). BSL assigned the trademarks for all of its brands to BCCL, which subsequently licensed these brands to Bajaj Corp for 99 years from March 12, 2008. The term is extendable for an additional 10 years.

Bajaj Corp is third largest producer of hair oils and the largest producer of light hair oils. Its key product is Bajaj Almond Drops, a premium brand that is currently the market leader in the light hair oil segment, accounting for approximately 92% of net sales and 93% of gross profit in FY 2010. There are also other hair oils, Brahmi Amla, Amla Shikakai and Jasmine Hair Oil. The value market share of Almond Drop stood at 50.3%, Brahmi Amla at 3.3%, and Amla Shikakai at 1.6% in FY 2010. It also produces oral care products under the brand name, Bajaj Black Tooth Powder.

It manufactures its products at three company-operated facilities at Parwanoo, Dehradun and Ponta Sahib and has production capacity for light hair oil of 74 million litres per annum. In addition, it has third-party manufacturers at Parwanoo, Himachal Pradesh, for hair oils and at Udaipur, Rajasthan, for oral care products.

It has 4,600 distributors, who sell to more than 1.56 million retail outlets located throughout India.

Net sales for FY 2010 increased by 35% to Rs 330 crore, while net profit grew by 80% to Rs 83.91 crore on operating profit margin (OPM) improving by 840 basis points to 29.5%.

The company intends to enter the capital market to raise money in the range of Rs 283 crore to Rs 297 crore by issuing around 45 lakh equity share of face value of Rs 5 each in the price range of Rs 630 to Rs 660 per share. The proceeds from the issue will be used for promoting its new products and for acquisition and other strategic initiative. It intends to leverage its Almond Drops brand name in other areas such as soaps, shampoos, creams and other hair-care products. It is also looking for entry into the cooling hair oil segment, which is growing fast, has less competition and has high margin.

Strengths

The company's manufacturing facilities are located in tax-free zone and currently enjoy exemption from excise duty for 10 years from the financial year ended 31 March 2009 and from income tax for the first five years, followed by concessional income tax rate for the next five years.

Bajaj Almond Drops, a premium brand, is currently the market leader, with value share of 50.3% in the light hair oil segment.

Its OPM is one of the best in the FMCG sector.

Weaknesses

92% of net sales come from Bajaj Almond Drops. It has only 4 hair oil brands

The company intends to raise nearly Rs 297 crore, which is much more than its net worth of Rs 25.6 crore as on 31 March 2010. The company paid dividend of Rs 92 crore in FY 2010, effectively withdrawing all profit till then.

Valuation

At the price band of Rs 630 to Rs 660 per equity share of Rs 5 face value, the P/E at the lower band works out to 22.15 times the EPS of Rs 28.4 for FY 2010. At the upper band, P/E works out to 23.2 times the EPS. In the FMCG industry, comparable companies such as Marico, Dabur India and Emami have P/E of around 31.25, 34.14 and 38.9 time FY 2010 EPS, respectively.

via CM