Single product company – ambitious future
Bajaj Corp Limited is tapping the capital markets with its IPO for 45 lakh shares in a price band of Rs 630-660. The face value of each share is Rs 5. The issue has received support from anchor investors and they have been allotted 8.1 lakh shares at Rs 650. The QIB portion has been subscribed 20.19 times after reducing the size of the issue from the anchor investor allocation. The issue has closed for QIB’s and would close for HNI’s and retail investors on Thursday the 5th of August.
| Price Band | Rs 630 – Rs 660 for face value of Rs 5 per share |
| Issue size in Rs | Rs 283.5 crs to Rs 297 crs |
| Offer size in shares | 45,00,000 Equity Shares |
| QIB’s | 27,00,000 Equity Shares |
| Non Institutional Investors | 4,50,000 Equity Shares |
| Retail Investors | 13,50,000 Equity Shares |
| Marketcap post issue | Rs 1858.5 crs to 1947 crs |
| Book Running Lead Manager | Kotak Mahindra Capital Company Limited |
| Syndicate Member | Kotak Securities Limited |
| Isssue Opening Date | Monday 2nd August |
| Isssue closing date for QIB’s | Wednesday 4th August |
| Isssue closing date for Retail and HNI’s | Thursday 5th August |
| Anchor Investors | 8,10,000 shares alloted at a price of Rs 650 per share of Rs 5 face value |
| IPO Grade | 4/5 by CRISIL Limited indicating above average fundamentals |
| Bidding Lot | 10 shares |
Business
Bajaj Corp Limited is the new avatar of Bajaj Sevashram. In 2001 the impending Bajaj family settlement saw the business demerged to Bajaj Consumer Care Limited. All trademarks of Bajaj Sevashram were assigned to Bajaj Consumer Care Limited. In 2008 these rights were granted to Bajaj Corp Limited for a period of 99 years. The premium brand of Bajaj Corp is Bajaj Almonds Drop hair oil which accounts for almost 92.4% of the total sales.
The market share of Bajaj almond drops which is a light hair oil is approximately 50.3% of the national light hair oil market. The other hair oils from the company are Brahmi Amla, Amla Shikakai and Jasmine hair oil. There is one oral care product under the brand name Bajaj Black tooth powder.
The company has grown its sales at a compounded annual growth rate of 32.4% over the last three years. The company dis tributes its products through 4600 distributors or stockists who in turn supply to 1.56 million retail outlets.
Objects of the issue
The objects of the issue are as follows: –
| 1. | Promote our future products | Rs 220 crs |
| 2. | Acquisitions and other strategic initiatives | Rs 50 crs |
| 3. | General Corporate purposes |
The company plans to spend the money raised on future products in the next three years.
Financials
The sales for the company in the financial year ended March 2009 has been Rs 244.42 crs while for the year ended March 2010 have been Rs 334.90 crs. The profit before tax has been Rs 52.90 crs in March 09 and Rs 101.55 crs in March 10. The profit after tax has been Rs 46.99 crs in March 09 and Rs 83.91 crs in March 10. The net margins after tax are a healthy 21.64% for March 09 which have improved further to 25.05% for March 10. These margins are likely to come under pressure as the company gears up to launch new products which are also the object of the issue. Its core product which is Bajaj almond drop hair oil however is expected to grow significantly as the total light hair oil segment is 13% of the hair oil market while coconut oil is roughly 60% of the market.
Brand spend and advertising has been a big part of the total expenditure like all FMCG products and in March 2009 the spend was Rs 17.97 crs and Rs 27.05 crs in March 10. If one were to compare this with sales the percentage in 2009 was 7.35% which has moved up to 8.07%.
Comparison
The peers in the FMCG space are the giants like Colgate Palmolive, ITC, Hindustan Unilever, Godrej Consumer, P&G, Emami, Marico, Dabur India and Jyothy Laboratories. In terms of turnover the smallest is from Jyothy Labs which was Rs 573 crs. The price earnings multiple for Jyothy is 22.8 based on March 2010 earnings, which incidententally is the lowest in the segment. Market leaders like ITC, HUL quote at 28.2 and 27.3 respectively based on March 2010 earnings.
Bajaj Corp had earned an EPS of Rs 18.79 in March 09 and Rs 33.56 in March 10 on the pre-issue capital of 2.5 cr shares. The price earnings multiple based on these earnings is between 33.5-35,12 on March 2009 earnings and a very respectable 18.77-19.67 times its March 2010 earnings. If one were to recalculate based on the post-IPO equity of 2.95 cr shares the valuations would change to 22.15-23.20 times, again respectable and comparable to its peers.
Risks
The biggest risk in the case of Bajaj Corp is its one product nature of business. Its flagship product Bajaj Almond drop hair oil accounts for 92.4% of its sales. This is an opportunity and a threat as well. Opportunity because almost 60% of the hair oil market is coconut oil users so that provides an opportunity and a threat because if anything went wrong with the brand it could spell trouble for the company.
The next risk comes from the fact that in over 57 years of existence there is just one product. The objects of the issue talk about four new products being launched and a sum of Rs 220 crs which is almost 75% of the issue size is to be spent over the next three years on promotion of future products. This is a big challenge to bring new products and make them sustainable.
Thirdly going forward as the company begins its product launches and promotion, margins will take a dip as they would be financial drain on the company. This is not to suggest that the company would become weak but irrespective of accounting policies the company would be burning cash to promote new launches.
The current brand is a premium product but not in the premium segment as hair oil is not used in the premium segment. New products using the almond image is what the company could capitalise and I believe in my opinion one such premium segment product could be using almond in the skin care business. This is a very competitive segment and one has products from world leaders fighting. One has the likes of ‘OLAY’, ‘Fair and Lovely’ the brand from ‘L’Oreal’, Emami and others. All of these are well advertised brands and most of them also have brand ambassadors.
Conclusion
The share is attractively priced on current basis. The objects of the issue are a cause for concern and there could be severe pressures on the company’s performance. There is a brand in ‘Bajaj’ but as mentioned earlier the fact that in 57 years it is just one product raises questions. QIB’s have subscribed whole heartedly to the issue and the same is over 20 times. There is likely to be listing gains and in the medium term the performance needs to be watched carefully. I believe post listing and listing gains yet more opportunities would be available in the share. Subscription for listing gains looking at QIB shares is warranted but for medium term and long term players there would be more opportunities subsequently as well.
Apply for listing gains only and QIB subscription is a comfort.
SEBI disclaimer: – I intend to apply for the issue for listing gains only.
