Q1FY24 Review: Bajaj Consumer Care: Lower ad-spends boost margins

11 Aug 2023 , 11:41 AM

Bajaj Consumer reported a top-line growth of 7% YoY, driven by ADHO portfolio (86% of revenue) that grew by 9%YoY. Gross margin showed a moderate ~26bps expansion, due to the consumption of high-cost inventory of light liquid paraffin (LLP) in Q1. However, Ebitda margin expanded 326 bps YoY to 17.8%, led by cut in ad spends. Mgmt reiterated the Ebitda margin guidance of ~18% in FY24, which analysts of IIFL Capital Services expect can be achieved with lower LLP price benefits flowing into the gross margin from Q2 onwards. For FY24, they upgrade their EPS estimates by 9% and for FY25-26, by 1- 2%. Maintain BUY with a TP of Rs280. 

In-line results: 

Revenues increased 7.1%YoY (in-line), driven by volume growth of 8% YoY (vs 10% growth in Q4). In Q1, ADHO registered a growth of 9%, contributing to 86% of sales in the quarter. At 11%, NPDs grew lower (vs 26%YoY growth in Q4) due to higher pipeline filing from 3 new launches in the base quarter. It is taking the recently launched coconut oil into GT with LUP strategy to drive growth. Organised trade comprising MT and e-commerce grew at 38%YoY and contributed 17% of sales in Q1. International business growth was 42%, driven by the rest of world growing at 77% and Middle East & Africa at 23%. 

Margins set to improve: 

At ~26bps, gross margin expansion was low, due to the consumption of high-cost inventory of LLP (+16%YoY) in Q1. It is expected to show significant expansion from Q2 onwards as the inventory gets exhausted. Ebitda margin expanded 326 bps YoY, largely led by a 232bps cut in ad spends. The company has guided for ad spends to remain in the range of 16-18% of revenue in the near term. 

EPS upgrades: 

With more than ~40% rural salience, Bajaj Consumer would be a key beneficiary of rural recovery. Mgmt targets to grow revenue in double digits, on the back of superior growth in coconut oil, AD extensions and international business (analysts of IIFL Capital Services have taken 8% in FY24). By FY24, Ebitda margin is expected to expand to 18%, led by easing of input costs and lower-than-expected ad spends. Analysts of IIFL Capital Services upgrade their EPS estimate for FY24 by 9% to factor in the faster-than-expected margin recovery and FY25/FY26 estimates by 2%/1%. Maintain BUY with a TP of Rs280.