No stickiness in its growth | Value Research Despite abstaining from the coconut-based oils segment, BCL has impressive numbers to show and remains a long term buy

No stickiness in its growth

Despite abstaining from the coconut-based oils segment, BCL has impressive numbers to show and remains a long term buy

Bajaj Corp (BCL), a Shishir Bajaj group company, is into hair care segment with primary focus on hair oils. The products and brands which BCL manufactures go back to 1950s when they were produced by various Bajaj group companies. In 2006, Bajaj group created an umbrella company-- BCL-- and transferred all the brands to it. They include 'Bajaj Kailash Parbat Thanda Tel', 'Bajaj Almond Drops Hair Oil', 'Bajaj Brahmi Amla Hair Oil', 'Bajaj Amla Shikakai Hair Oil' and 'Bajaj Jasmine Hair Oil'. The other group companies are Bajaj Hindustan and Bajaj Infrastructure Development.

Hair oil market size in India is pegged at around Rs 8,000 crore with coconut-based oils accounting for 46 per cent. Non coconut or perfumed oil segment, in which BCL operates, has a market size of Rs 4,283 crore. Among all, light hair oil is the fastest growing segment with a CAGR of 25 per cent in the last 5 years whereas the overall hair oil market has grown by 19 per cent over the same period. Around 40 per cent of the light hair oil sale comes from the rural market, as per Nielsen retail report 2013.

BCL's flagship brand 'Bajaj Almonds' has remained market leader in the last few decades with market share of 55 per cent in the light hair oil segment or 20 per cent of the perfumed oil segment. As per market research agency IMRB, 'Bajaj Almond Drops' is consumed by 2.5 crore households, or approximately 12.5 crore individuals, on an yearly basis.

The company also leads in the low unit price (LUP) packs with a market share of around 95 per cent. LUPs' major demand comes from the rural market and is cost effective too due to its packaging size.

The company has a high operating profit margin of 35 per cent and net profit margin of 26 per cent which is highest among its peers. A major reason for this is that BCL does not operate in the coconut-based oil segment which is a commodity based business and is low margin too. One of the core strengths of BCL is its distribution network which reaches out to 6,693 stock points. With almost half a century of dominance in the market, the company has created a goodwill and long list of stockists and super stockists which reach out to most of the interiors of rural India.

Growth drivers
Rural market: BCL operates in a segment where the future demand will mainly be driven from the rural market. The company is strengthening its existing distribution network to ensure it reaches to even more remote places and untapped rural areas. Rural India has witnessed a rise in purchasing power over the last few years and they have been switching from cheaper hair oils to almond-based and other perfumed light hair oils.

Acquisitions: The management made its intension clear in 2012-13 to acquire companies or brands and tap new high growth market segments or to consolidate its existing segment of hair care. And in line with its plan, the company acquired 'Nomarks' from Ozone Ayurvedics in August this year. The move will give it a foothold in the skin care segment which is also witnessing a growth spree.

Bangladesh operations: The company has set up a subsidiary, Bajaj Bangladesh, to exploit the hair care products and related market in Bangladesh. The subsidiary will manufacture products with a third party agreement and the operation is expected to commence by end of the FY14. As Bangladesh is also as a huge untapped market, BCL is going to benefit from its operations.

Marico, one of the largest producers of hair oil, launched its 'Nihar Shanti Amla' hair oil in the almond oil segment last year. Also, Dabur came up with its 'Dabur Amla' two years back, which means the competition is only going to intensify and may eat away a portion of BCL's market share where it has ruled in the past.

The company does not operate in the coconut-based oil segment which is largest selling segment in hair oils, thus missing out an opportunity to escalate the top-line growth. However, coconut oil segment yields a margin which is not highly attractive currently.

With other hair care products like conditioners and specialised hair products becoming more prevalent, hair oil may witness a drop in usage, especially in urban market. Moreover, BCL's high operating and net profit margins may not be sustainable over a very long period of time due the rising cost of raw material and its expansion plans.

Revenue has grown at an annualised rate of 25 per cent and earnings by 38 per cent over the last 4 years since BCL took over Bajaj group's brands and started its operations. It remained a debt-free company until FY13 when it raised a debt of Rs 60 crore for the 'Nomarks' brand acquisition in FY14 but still, debt to equity ratio is low at 0.10. The company has cash and equivalents of Rs 390 crore and has generated consolidated free cash flow Rs 143 crore, which means the company does not need to leverage more for the future expansions.

Other Categories