IPO Review: Bajaj Corp

 

 

Considering Bajaj Corp's growth prospects and better past performance, the IPO looks attractive

IPO details

Company Name: Bajaj Corp
Issue Size: Rs 297 crore
Price Band: Rs 630-660
Issue Date: Aug 2 - 5


THE Shishir Bajaj Group company, Bajaj Corp is floating an initial public offer of around 4.5 million shares to raise around Rs 300 crore (Rs 297 at the upper price-band). The issue is being made through a 100% book-building process in the price band of Rs 630-660 per share with a face value of Rs 5 each. The fresh issue is equivalent to 15.3% of the company's post IPO equity and the issue will result in the promoters' holding falling to 85% Of the total proceeds, the company will use Rs 220 crore to launch new products over the next three years and Rs 50 crore will be set aside for acquisitions and other strategic initiatives. While the remaining amount of little less than Rs 30 crore will be used for general corporate purposes.

BUSINESS:

Bajaj Corp is India's thirdlargest producer of hair oils after Dabur and Marico. It is the market leader in the light (nonsticky) hair oil segment with a 50.3% market share. The company markets hair oil under four brands — Bajaj Almond Drops, Brahmi Amla, Amla Shikakai and Jasmine. Almond oil contributed around 92.4% to the entire sales in FY10. The company also produces oral care product under the brand name Bajaj Black Tooth Powder. The company has three manufacturing plants at Parwanoo, Dehradun and Ponta Sahib. Operations at Ponta Sahib commenced from March 2010, which more than doubled its production capacity for light hair oil top 74 million litres per annum. Additional third party manufacturing for 9 million litres per annum makes the combined production capacity of 83 million litres per annum.

   The company expects to grow its market share in the hair oil space by further increasing its share of the light hair oil besides trying to convert the users of coconut and amla hair oil. Currently light hair oils comprise only 13% of the total hair oil market. This is much lower than 60% share of the coconut oil. The Indian light hair oil industry is growing at an 18% per annum by volume (CAGR for past 4 years) and 28% by value (CAGR for last 4 years)

FINANCIALS:

The net sales of the company, which has grown by CAGR of 32% in past three years, was Rs 331 crore in FY10. In the past one year, the revenues grew by around 35% and profit after tax grew by around 79%. The company's A&P spend to sales is around 18% which is only second to Colgate-Palmolive in the FMCG industry and the management expects this ratio to continue for another 3 years at least. The company is debt free and not much capital expenditure will be required for the next three years. The networth of the company has decreased from Rs 51.58 crore in FY09 to Rs 25.6 crore in FY10 as the company paid a huge dividend to its shareholders to satisfy Sebi criteria for listing. Return of capital employed was 255% in FY10 and 187% in FY09, however, the management expects this to reduce substantially in the current financial year.

CONCERNS:

Inordinate increase in crude prices could affect the raw material cost. It may not be possible to pass on the entire impact to consumers and thereby hurt the operating margins. The performance of the company depends on one brand – Bajaj Almond Drops Hair Oil, which contributes 92.4% to the total sales.

VALUATION:

At the higher end of the price band, Bajaj Corp seeks a P/E multiple of around 23.3x, adjusted for the IPO equity dilution. This looks reasonable when compared to its industry peers. Other companies that are also in the hair oil business are Dabur India (39x), Marico(31x), HUL(27x ) and Emami(37x).

   Considering its past performance, higher margins and asset light business, at such a low valuation, this IPO appears to be an attractive one.