Bajaj Corp’s profitability faces near-term challenges

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Shares of Bajaj Corp Ltd have risen by 13% since 12 October, when it announced its September quarter results. This is despite a dull showing as investors appear to have factored in a likely revival in performance. Revenues increased by a sub-par 3.8%, and profit dropped 13% on higher expenses and margin compression. But volume growth at 5.1% was a positive factor, as volumes of its Almond Drops hair oil brand, which generates 93% of revenue, rose by 6.5%.

The increase in volume reverses the trend of decline in volumes for four consecutive quarters. That has stoked hopes of a recovery, even though this quarter may have a one-off boost and sustaining it could be a long-drawn process.

Elara Securities (India) Pvt. Ltd attributes a large part of the volume recovery to restocking post the implementation of the goods and services tax. Also results show that demand from rural areas remains weak and sales to the Canteen Stores Department segment are on a downtrend due to changes in procurement. Importantly, the distribution network is yet to entirely adjust to the new tax law.

According to Edelweiss Securities Ltd, wholesalers continue to remain cautious about restocking, and around 8,800 wholesalers are yet to begin the exercise. To counter this, Bajaj Corp is increasing its direct reach which should help it in the long run. But the strategy involves costs, at least in the near term.

Analysts at Elara Securities point out that the company is giving higher trade schemes to support their channel partners. Further, it plans to add new products which could keep advertisement and promotional expenses at elevated levels. Add to this the increase in raw material costs and demand challenges, and some analysts fear profitability could be under pressure in this fiscal year. “Higher branding and media spends along with the increase in some of the key input prices would put pressure on margins in the near term,” Sharekhan Ltd said in a note. “Overall, we expect FY2018 to see moderate earnings growth, but expect it to revive in FY2019 (on account of sustained improvement in sales volume).”

That said analysts are not unduly worried. They expect investments in distribution and new products to yield benefits in FY19. Also, the industry outlook appears to be improving as seen from bellwether Hindustan Unilever Ltd’s results.

Even then, investors would like to see Bajaj Corp maintain the uptrend seen in its volume growth. That will provide confidence that it is on the recovery path. “We expect volume growth to recover to double-digit level in the latter half of FY18, aided in part by a favourable comparator—this should aid stock performance especially given a steep 45%+ discount to the sector’s 12M forward multiple (ex-ITC),” JM Financial Research said in a note.