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A strong rebound in volume growth fuelled Bajaj Corp’s December 2014 quarter performance, when sales stood at Rs 205 crore, up 29.8 per cent year-on-year (y-o-y) and net profit at Rs 42 crore, up 43.8 per cent y-o-y. While sales were 8.2 per cent ahead of Bloomberg consensus estimates, net profit was 4.3 per cent higher than expected.
The 21.1 per cent y-o-y volume growth, the highest since the December 2012 quarter and far better than the single-digit volume growth in the past four quarters, was partly due to the low base effect, given that volumes had risen just 0.9 per cent in the December 2013 quarter. However, the bigger contributor was Almond Drops (91 per cent of the company's revenues), which clocked a 19.2 per cent rise in volumes. Almond Drop brand’s volumes had fallen by an average 2.2 per cent over the past four quarters, owing to slowdown in the hair oil sector, leading to inventory pileup with distributors. A revival in rural demand, an uptick in discretionary spends and strong traction in light hair oils are key reasons for improved volume growth in the quarter gone by. In future, too, the management expects volumes to remain strong.
Apart from strong volumes, lower costs (input and employee costs, etc) led to an earnings before interest, taxes, depreciation, and amortisation margin expansion of 220 basis points (bps) y-o-y to 29.2 per cent, which along with lower interest costs more than offset the fall in other income. The margin gains could have been bigger but for the higher advertising costs (up 170 bps to 19.6 per cent of sales) towards NoMarks brand. The management will continue to invest in advertising NoMarks, which can post 45-50 per cent compounded annual growth revenue over FY14-17.
The management also plans to capitalise on lower input costs by bundling free products with its own offerings, to push volumes. Overall, Bajaj Corp is expected to post revenue growth of 16-17 per cent and net profit growth of 22-25 per cent of the next two years. From FY17 onwards, profits are expected to grow at a faster pace as amortisation costs pertaining to NoMarks acquisition will be fully accounted for. Bajaj Corp amortised Rs 29 crore in FY14 and is expected to amortise Rs 47 crore each in FY15 and FY16 towards the NoMarks deal.
The huge dependence on a single brand, Almond Drops, remains a risk. The good part is, this segment is the fastest growing in hair oils and, secondly, the firm has so far been able to sustain its volume market share of 58.7 per cent despite intensifying competition. In this backdrop and given the recent outperformance, investors with a medium-term horizon could consider the stock on corrections.
