Stock Pick From FMCG Industry

Here Is Why:

• Volume growth at five-year high

• Market share continues to improve

• Earnings beat estimates in Q1 FY16

As per industry estimations, the branded FMCG market in India is around Rs 1,670 billion of which hair care constitutes 8 per cent. The Indian hair care market India is dominated by hair oils rather than shampoos and others. Over the past five years, the branded hair oil segment has shown 12.3 and 19.6 per cent CAGR in volume and value terms respectively. However, the next leg of growth for branded hair oils will come from the shift in consumer preference from unbranded to branded hair oils, led by rising urbanisation and increasing income levels. From this space, we have chosen a leading player in the hair oil segment - Bajaj Corp, which has posted an outstanding performance over the years.

Bajaj Corp operates in the cosmetics’ business segment with major brands in the hair care category. The company is a leading player in the light hair oil (LHO) category in India. Its key brands in the LHO segment are Bajaj Almond Drops Hair Oil, Bajaj Kailash Parbat Cooling Oil, Bajaj Brahmi Amla Shikakai Hair Oil and Bajaj Jasmine Hair Oil. The company generates around 90 per cent of its revenues from the LHO segment and around 10 per cent from other personal care brands.

Bajaj Corp has a strong distribution network consisting of 6,093 distributors for direct distribution and 11,548 wholesalers for indirect distribution. The company is continuously looking for increasing the number of its dealers and sales team, particularly in rural areas, to tap higher penetration across the country. Bajaj Corp is expecting the growth momentum to be carried into the forthcoming years and is therefore planning to increase its consumers from heavy oils to light hair oils and also the upgradation of consumers from unbranded oils to branded oils.

Bajaj Corp reported high volume growth of 23 per cent in FY15 on a yearly basis driven by significant growth in Bajaj Almond Drops Hair Oil and No Marks. The flagship brand, Bajaj Almond Drops Hair Oil, saw volume growth of 23.8 per cent year-on-year and a value growth of 27.8 per cent year on year. The market share of Bajaj Almond Drops Hair Oil has improved by 100 basis points to 60.5 per cent on a yearly basis. The company is aiming to grow its market share to around 65 per cent by end of FY16. Furthermore, the recent fall in commodity prices has led to sharp expansion in gross margin, which is expected to continue in FY16.

On the financial front, Bajaj Corp posted a growth of 23 per cent in its total income in FY15. Interestingly, the EBITDA rose by 29 per cent against last year with an EBITDA margin expansion of 129 basis points to 28.98 per cent. In Q1 FY16 the company reported similar kind of outstanding performance and continued to expand its EBITDA margin by another 222 basis point to 30.28 per cent as compared to Q1 FY15. Bajaj Corp entered the skin care segment in August 2013 with the acquisition of No Marks. Currently, the brand constitutes around 7 per cent of the company’s revenues. The company’s aim is to invest aggressively into the brand and revive the brand’s equity in the next two to three years. It is also looking for more acquisitions to grow its business.

Considering its financial performance till date, Bajaj Corp is looking financially strong with consistent year-on-year volume growth and margin expansion. The company has conceptualized good future business strategies for expanding its reach. Hence we advise taking exposure in this stock.