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Buy Bajaj Corp, target Rs 420: SBICAP Securities


SBICAP Securities has a buy call on Bajaj Corp with a target price of Rs 420.

The current market price of Bajaj Corp is Rs 387.55.

Time period given by the brokerage is one year when Bajaj Corp price can reach the defined target.

Investment rationale by the brokerage-

ADHO continues to guide growth trajectory: After relaunching ADHO in September 2018, the company has been pushing it quite aggressively with active multimedia support, distribution and new SKUs. The Rs 10 SKU, pushed to bridge the gap in the Rs 1 sachet and 50ml SKU (gap of 32x), has grown handsomely and is now 5.6 per cent of the company’s volume.

Of the four launches/relaunches, two fared well: As a part of its portfolio revamp, the company is concentrating on ADHO and Brahmi Amla Hair oil, both of which it has relaunched. ADHO was relaunched in September 2018 with a differentiated strategy and has seen improved traction, as reflected in improved offtake. Brahmi Amla was relaunched in September 2017 and has met with mixed success, given its higher reliance on the volatile CSD channel (contribution at nearly 35 per cent); ex-CSD, the brand is doing well. A new product introduced in the hair oil space was Bajaj Coco Jasmine hair oil in January 2018; it is in the pilot stage, with testing underway in select cities. Nomarks has seen improved traction after its relaunch in July 2018.

High-cost inventory to have a bearing on 4Q margins: The management noted that it has high-cost inventory till February 2019, after which it will benefit from low-cost LLP. The management is concerned about sustaining current margin in the long run, due to likely new launches and acquisitions.

Valuation attractive, but risk-reward benefit shrinking: The Company aspires to become a total FMCG company, so it plans to enter new categories (hair care and skin care) in the coming quarters. While we appreciate the company’s efforts to diversify and become a complete FMCG company and reduce its dependency on a single product, we await its new category endeavours. The stock has outperformed the broader market by nearly 9 per cent in the last 1 month but has underperformed by nearly 28 per cent on a 12-month basis. Valuation, at 22x for FY20, looks relatively attractive but the risk-reward is diminishing given a) limited premiumization potential, b) continued high dependence on ADHO, c) delayed new category incubation and d) likely margin suppression from new launches and acquisition (as per management guidance).

Source: Economic Times