| Summary of Contents STOCK UPDATE Bajaj Corp
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs208
Current market price: Rs187 Price target revised to Rs208 Result highlights -
Results marginally ahead of expectation: Bajaj Corp Ltd's (BCL) Q2FY2013 results are marginally ahead of our expectation (by 5%), largely on account of a higher than expected gross margin (GPM) during the quarter. The net sales grew by 27.2% year on year (YoY) to Rs135.9crore (in line with our expectation of Rs134 crore) in Q2FY2013. With an improvement of around 375 basis points in the GPM, the reported profit after tax (PAT) grew by 33.6% YoY to Rs38.4 crore, which is marginally ahead of our estimate of Rs35.6 crore. -
Another quarter of close to 20% growth in sales volume: The second quarter of FY2013 was the seventh consecutive quarter of close to 20% growth in sales volume. It reported a sales volume growth of ~19% in Q2FY2013 on the back of sustained strong volume growth in its flagship brand Bajaj Almond Drops Hair Oil (ADHO). The sales volume of Bajaj Kailash Parbat Cooling Oil (KPCO) almost doubled on a year-on-year (Y-o-Y) basis to 12,745 cases during the quarter. The strong volume growth can be attributed to sustain conversion of the consumers from coconut oil to light hair oil category and an improvement in the distribution reach. -
Profitability improved significantly: In Q2FY2013, the GPM of the company improved significantly, by 375 basis points YoY and 150 basis points quarter on quarter (QoQ), to 57.2%. The strong improvement in the GPM can be attributed to sustained strong volume growth, close to 7.3% YoY improvement in the blended realisations and around 5% Y-o-Y decline in the price of light liquid paraffin (LLP), a key input for the company. The operating profit margin (OPM) improved by 312 basis points YoY to 28.7% during the quarter. With the LLP prices showing a downward trend and vegetable oil prices likely to decline from the current level, we expect the GPM to remain firm in the coming quarters. -
Outlook and valuation: The second quarter of FY2013 was yet another quarter of strong operating performance by BCL. The highlight of the quarter was a strong improvement in the GPM on both Y-o-Y and sequential bases. We broadly maintain our earnings estimates for FY2013 and FY2014. With the volume growth likely to sustain at around 20%, we expect BCL's top line and bottom line to grow at compound annual growth rate (CAGR) of 23.2% and 26.3% respectively over FY2012-14.
At the current market price, the stock is trading at 17x its FY2013E earnings per share (EPS) of Rs11.0 and 14.4X its FY2014E EPS of Rs12.9. In view of the consistent strong performance for the past several quarters, we have revised upwards our target multiple for the stock to 16x, which is a 40% discount to the current valuation of our fast-moving consumer goods (FMCG) basket. Our revised price target for BCL now stands at Rs208. However, due to the minimal upside, we maintain our Hold recommendation on the stock. The key monitorables would be any development on acquisition front in the domestic and international markets, and the company's ability to adequately utilise the cash for improving the business fundamentals.
SHAREKHAN SPECIAL Q2FY2013 Auto earnings preview
Tough quarter; expect earnings to pick up in H2FY2013 Widespread earnings decline to make Q2FY2013 the weakest quarter of recent times
The Sharekhan automobile (auto) tracking universe (consisting of coverage and non-coverage auto companies) is expected to report a 7% year-on-year (Y-o-Y) earnings decline for Q2FY2013. Barring Eicher Motors and a few auto ancillaries, the quarter is expected to remain weak for most of the companies. The lower double-digit growth in the top line lost traction with a mid single-digit operating profit growth and ultimately failed to translate into a positive bottom line. M&M and Eicher Motors to outperform OEMs, Apollo Tyres and Exide Industries to lead the ancillary pack
Automobile original equipment manufacturers (OEMs) are expected to report an 11.3% Y-o-Y decline in profit after tax (PAT). Eicher Motors and, Mahindra and Mahindra (M&M) are expected to report a flat growth in an otherwise broad-based decline. A few ancillaries, such as Apollo Tyres and Exide Industries, are expected to report a significantly higher growth on the low corresponding base.
Maruti Suzuki (Maruti), TVS Motor Company (TVS Motor) and Ashok Leyland are expected to disappoint the most amongst the OEMs because the earnings got affected by specific issues related to these companies. Greaves Cotton would disappoint the most amongst the ancillaries. Q2FY2013, a wash-out quarter; a better outlook for H2FY2013
Given that the festive season is shifting largely to Q3FY2013 and Q4FY2013 being the strongest quarter of year in terms of demand, earnings are expected to bottom out in Q2FY2013. Apart from the festive buoyancy, the forthcoming period is expected to see the benefits of the recently lowered interest rates. In a structural upturn, companies that hold on to their market share or are expected to gain back the lost ground would gain the most. M&M and Maruti would outperform amongst the OEMs. We would avoid Hero MotoCorp as the rupee's appreciation alone cannot warrant outperformance of the stock. Q2FY2013 Pharma earnings preview
Strong growth momentum to continue Key points -
Robust aggregate revenue growth of 32% supported by the international business: We expect our pharmaceutical (pharma) universe to report a 32% year-on-year (Y-o-Y) growth in revenues in Q2FY2013 on an aggregated basis, mainly led by a 39% Y-o-Y growth in the international business (aided by key launches in the US and depreciation of the rupee). On the other hand, the domestic formulations business is expected to grow moderately by 12.5% year on year (YoY), mainly due to the high base effect in case of Sun Pharma (flat growth YoY). However, companies like Lupin (22.5% YoY), Glenmark Pharma (19% YoY) and Cadila Healthcare (16.5% YoY) will be outperforming the domestic formulation market during the quarter. -
Margin boosted by the better product mix and currency benefits: We expect the operating profit margin (OPM) to expand by 377 basis points YoY to 27.1% for our universe during the quarter. Except Ipca Laboratories (Ipca) and Opto Circuits, most of the players would see an expansion in the OPMs mainly due to the better product mix and currency benefits. However, players like Piramal Healthcare and Dishman Pharma are not strictly comparable on a Y-o-Y basis, due to business restructuring affecting the base business in Q2FY2012 for both these companies. However, even excluding these companies, OPM should expand by 145 basis points YoY to 24.7%. The OPM of Ipca would be affected due to the high base effect (reversal of certain portion of the employee's expenses helping stronger margins) while that of Opto Circuits would be affected due to the higher raw material costs and other expenditure. -
Adjusted PAT to grow by 21% YoY: We expect our pharma universe to report 21% rise in the net profit excluding marked to market (MTM) foreign exchange losses or gains. The growth would be mainly led by Cadila Healthcare (up 46.9% YoY) and Ipca (up 39.5% YoY) followed by Piramal Healthcare (up37.6% YoY), Sun Pharma (35.1% YoY) and Torrent Pharma (up 32.9% YoY). Glenmark Pharma is likely to witness a decline of 41% YoY, mainly due to the deferred tax credit recorded in Q2FY2012, thus making a high base. Dishman Pharma is likely to see a turnaround in the profits during the quarter.
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