My Mistakes – Good product, unknown management (Bajaj Corp)

My Mistakes – Good product, unknown management 
I use ‘Bajaj Almond Drop’ hair oil. It is a good product, but I didn’t know much about the management. I overestimated the product without knowing the management. My opinion was wrong on Bajaj Corp. Bajaj Corp may work in the future, but I don’t want to back unknown management. I made mistakes in the past, and I will make mistakes in the future.

Bajaj Corp is the second largest player in the overall hair oil segment. The company’s major products include Bajaj Almond Drop, Bajaj Brahmi Amla, Bajaj Kailash Parbat, Bajaj Amla Shikakai, Bajaj Jasmine Hair Oil and Nomarks Cream.

Key Facts:
– Bajaj Almond Drops is the market leader in the Light Hair Oil segment with 62% market share
– Bajaj AD market share has doubled in the past 10 years from 31.4% in FY06 to 62% in FY16
– Bajaj AD has increased its 100 ml bottle price from Rs 30 in FY06 to Rs 60 in FY16
– Bajaj AD is a premium perfumed hair oil containing almond oil and Vitamin E
– Bajaj AD commands premium pricing and one of the highest per unit prices in the industry
– Bajaj AD earns 61% of its revenue from Urban and 39% from Rural
– Almond Drops is a brand used by both men (54%) and women (46%)
– Ventured into the anti-marks skin care business with the acquisition of Nomarks in 2013
– Bajaj Nomarks Cream is the No. 1 cream in the anti-marks segment as of Mar 2016
– The company has a strong distribution network of 3.7 million retail outlets across the country
– Ms. Saina Nehwal is the brand ambassador for its Anti-Marks Skin Care products

– Mr. Kushagra Bajaj, Chairman of Bajaj Corp, is the great-grandson of Shri. Jamnalal Bajaj. He holds Bachelor of Science in Economics from Carnegie Mellon, USA and Master of Science in Marketing from the Northwestern University, USA
– Mr. Kushagra is a recipient of the prestigious Padma Shri award in 2011
– Mr. Sumit Malhotra, Managing Director of Bajaj Corp, has over 23 years of experience in the FMCG sector. He holds an MBA from IIM, Ahmedabad
– Mr. Sandeep Verma, President of Sales and Marketing, has worked at HUL for 14 years. He holds an MBA from IIM, Lucknow
– Consistent dividend payout
– Unknown management

Opportunity Size:
– Hair oil is a Rs 9400 crore industry in India of which 64% belongs to the perfumed oil category
– LHO market share has increased from 14% in FY11 to 17% in FY16 and has been growing at 14% CAGR over FY11-16
– Long term potential from the LHO segment is high because it is still in a nascent stage and increasing number of customers are shifting from coconut oil to LHO
– Bajaj Corp is focusing on the rural market where there is more scope for growth. Almond Drops is the only brand available in sachets: a marketing initiative to penetrate the rural market
– The company’s international foray is also doing well, and it plans to increase its export share from 4% to 10% in the next 3-4 years
– Anti-marks skin care business is a Rs 730 crore industry in India

– The company derives 90% of its revenue from a single product, Bajaj Almond Drops
– Hair oil has a 92% penetration in India, leaving less room for growth
– Raw material and packaging cost is 40% of its net revenue
– Excess volatility in raw material (LLP, a derivative of crude) prices could negatively impact its profitability
– Faces tough competition in the Skin Care business from other brands
– Urban dominated segment due to its relatively higher pricing but Rural is leading the growth

– Promoters hold 67% of the company
– Baytree Investments holds 8.1% of the company
– Matthews India Fund holds 4.4% of the company
– Goldman Sachs India holds 1.7% of the company

Detailed Analysis:

1. Is the business simple and understandable?
Yes. It is a simple and stable business. The company generates revenue from the sale of hair oils and anti-marks skin care products.

2. Does the company have a consistent operating history?
Yes. The company has been successfully doing this business since 1953.

3. Does the business have a sustainable competitive advantage?
Yes. Bajaj Almond Drops is the market leader in the LHO with 62% market share. It as a strong distribution network of 3.7 million retail outlets across India.

4. How good is management at allocating capital?
Good. The return on equity is more than 40%.

5. What are the risks?
The risks are highlighted above under section ‘Risks’.

6. Does the business operate in a good or bad industry?
Good Industry. Hair oil is Rs 9900 crore industry in India of which 64% belongs to the perfumed oil category.

7. Does the company earn high profit margin?
Yes. The operating profit margin is consistently above 25% for the past 5 years. It has the highest EBITDA margins in the industry.

8. Does the company generate strong free cash flow?
Yes. Bajaj Corp consistently generates free cash from its operations. The company has Rs 462 crore cash on its book.

9. Can you sensibly estimate future earnings for next five years?
We think so. Light Hair Oil segment is increasing its market share every year. Bajaj Corp is also building the brand in the Anti-Marks Skin Care business with increasing promotions.

10. Valuation:
At the current price of ₹390, the rate of return is 4.7% based on pre-tax earnings to market cap and the dividend yield is 3%. It is available at 7.2 times of sales to market cap.

PE Analysis:
In the last 3 years, Bajaj Corp had a strong support around 24x PE, which is ₹365.



19-Jul-2019: The company had hired Bain to help it control costs and form strategies to push growth of its hair oil business.

15-Oct-2019: Promoters sells 22% stake in Bajaj Consumer Care for 628 crore

16-Oct-2019: Promoters offloaded around 22% stake in Bajaj Corp to repay promoter’s personal debt and share pledge.

17-Oct-2019: There is no further debt at the promoter level post the stake sale, says Kushagra Bajaj


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