MEDIUM TERM BUY - BAJAJ CORP

Bajaj Corp

BSE: 533229    NSE: BAJAJCORP  CMP :  109.00

Strong presence in the fast-growing light hair oil category: Bajaj Corp Ltd (BCL), part of the Shishir Bajaj group, is the third largest player in the hair oil segment and has emerged as the dominant player in the premium light hair oil (LHO) category with its Almond Drops hair oil. Driven by a rise in the disposable income and aspirations of consumers the LHO market has seen a strong growth of 25.5% CAGR in the past four years. With its strong positioning, product differentiation and distribution strength, BCL has grown at a relatively much higher rate and increased its market share in the LHO category from 38% to over 50% in the same period.

Enhancing its product portfolio: Leveraging on its strong presence in the LHO segment and the distribution strength of over 2 million retail outlets, BCL is looking at enhancing its product portfolio through brand extension and introduction of new products. In line with this strategy the company has recently launched Kailash Parbat Cooling Oil (KPCO) in the cooling hair oil category. The initial response has been quite encouraging with KPCO achieving a volume market share of 1% within the first quarter of its launch.

Strong growth momentum to sustain: Despite the hike in the average selling price in response to the rising input cost, BCL was able to report a strong volume growth of 19.9% in Q1FY2012. The company would be able to sustain a healthy double-digit volume growth in its flagship brand, Almond Drops, while the newly introduced KPCO would bring in the incremental growth in volumes. Consequently, we have factored in a 17% compounded annual growth in volume over the next two years.

Attractive valuations: With leadership in the LHO category, BCL is well poised to achieve a good growth in a scenario in which people are climbing up the value chain and consumption in rural India is on the rise. We expect BCL's top line and bottom line to grow at CAGR of 24% and 18% respectively over FY2011-13. It has around Rs400 crore as cash & cash equivalents which provides an opportunity to carry out both organic and inorganic growth activities. The stock is currently trading at 13.7x its FY2012E EPS of Rs8.0 and 11.2x its FY2013E EPS of Rs9.7. Considering the company's good cash generation ability and the better visibility of its earnings over the next two to three years, we believe the stock is trading at a stark discount to some of its FMCG peers.One can buy  at current levels for a medium term target of 150.00.