Bajaj Corp

Bajaj Corp is entering the capital market on 2^nd August 2010 with a fresh issue of 45 lakh equity shares of Rs.5 each, in a price band of Rs.630 to Rs.660 per share. The company will raise Rs. 284 to 297 crore, depending on the price discovered via the public issue, which closes on 4^th August for QIB bidders and on 5^th August for retail and HNI category. Through the issue, the company is looking to dilute 15.3% equity.

A Shishir Bajaj group company, Bajaj Corp is India's third largest producer of hair oils. The company's brand portfolio comprises of Bajaj Almond Drops, Brahmi Amla, Amla Shikakai and Jasmine Hair Oil in the hair oil segment and Bajaj Kala Dant Manjan in the oral care (tooth powder) segment. Bajaj Almond Drops, a premium brand, is the largest selling light hair oil in India, accounting for 50.3% market share by value and about 47% share by volume. However, the company is heavily dependent on this single product, which generates about 92% of annual sales.

The company has an aggregate annual manufacturing capacity of 8.3 crore litres of oil, at 3 company-operated premises (2 in Himachal Pradesh and 1 at Dehradun) and 2 third-party facilities (in Himachal Pradesh and Rajasthan). It has a national distribution reach of 15.6 lakh retail outlets through its 4,600 distributors and 8,900 wholesalers.  

The company's manufacturing facilities are located in tax-free zones, due to which it is exempt from excise duty for a period of 10 years beginning FY09. It also enjoys benefits under section 80I-C of the Income Tax Act, due to which it is exempt from income tax for 5 years beginning FY09 and thereafter will be taxed at concessional rates for next 5 years.

The objects of the issue are:

With a limited product portfolio and heavy dependence on a single brand, the company's prospects are vulnerable to the success of its 4 products to be launched in the near future. Moreover, the company is yet to identify the products or companies to be acquired, for which Rs. 50 crore has been earmarked from the issue proceeds.

Pg 26 of the RHP states that funds deployed towards general corporate purposes may constitute over 30% of the issue size. However, this contradicts the objects of issue. The company is expected to raise about Rs. 297 crore, at the upper end of the price band at 660. In that case, funds available for general corporate purposes would be Rs. 27 crore, amounting to only 10% of the issue size. Then how can the funds for general corporate purposes be close to Rs. 85-90 crore, in any case? Are the other objects of the issue, specially acquisitions, a mere gimmick for fund raising?

The company does not have much operating history as it was carved out from its parent Bajaj Consumer Care Limited only in 2008. For FY10, it clocked revenue of Rs. 330 crore and earned net profit of Rs. 84 crore, thereby earning an EPS of Rs. 33.6 on equity of Rs. 12.5 crore (2.5 crore shares of Rs. 5 each).

As on 31^st March 2010, it had a networth of Rs. 26 crore, down from Rs. 51.2 crore as on 31^st March 2009. The book value per share, as on 31^st March 2010, was Rs. 10.24. The low book value was due to the 110% interim dividend pay-out in FY10, mainly to benefit the promoters, before the company went public. The company declared interim dividend twice, at 700% and 176% in Dec 2009 and Mar 2010, respectively, entailing a total payout of Rs. 107.6 crore (inclusive of dividend tax). As on date, the company enjoys debt-free status.

Compared to peers, the company enjoys healthy net profit margin due to limited scale and depth of operations. Going forward, as new product launches are undertaken, margins are likely to come under pressure.

At the lower and upper end of the price band, the company is issuing shares at PE multiples of 18.8 and 19.7 times, respectively. This works out to valuation of Rs. 1,850 to Rs. 1,950 crore, mainly for 1 hair oil brand - Bajaj Almond Drops. The issue price factors in the growth of future products to be launched by the company. Listed peers, both Indian and MNCs, much larger in size, are presently ruling at PE multiples of 25 and above on the bourses.

On a relative basis, the valuation seems to be fair. However, taking a fundamental call leads to a neutral view on the issue. The company being an FMCG player, considered a defensive sector, may give safe returns to investors in the longer term, as it continues to grow through new product launches and strategic acquisitions to taps its distribution reach further.