Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Bajaj Consumer Care Limited (BCCL; formerly Bajaj Corp Ltd).

 

The rating continues to reflect the company’s leading market position in the niche light hair oil (LHO) segment, moderate operating efficiency and healthy financial risk profile, driven by nil debt. These strengths are partially offset by product concentration risk, with high dependence on Bajaj Almond Drops Hair Oil (ADHO), inflationary pressures and subdued rural demand, which are likely to keep the operating margin under pressure in the short term, and exposure to intense competition in the fast-moving consumer goods (FMCG) industry.

 

Revenue de-grew by ~4% in fiscal 2022 on account of inflationary pressures impacting overall demand, leading to downtrading, with the hair oil market in north and central India (key markets of BCCL) being more impacted and subdued overall hair oil market. Furthermore, operating margin fell to 19.8% in fiscal 2022 from 26.2% in fiscal 2021 due to significant input cost inflation.

 

The revenue growth of BCCL in fiscal 2023 is likely to be supported by product launches, price hikes and recovery in rural demand. In the first quarter of fiscal 2023, the company reported revenue growth of 14.7% over low base of the previous fiscal (impacted by the second wave of the Covid-19 pandemic) aided by increase in coconut hair oil demand and price hike, leading to higher realisations. The operating margin further reduced to ~15% in the first quarter of fiscal 2023 owing to continued input cost inflation, impacting gross margin, as well as higher advertising and promotional spends for investment in new products.

 

The company’s cash-generating ability has led to strong internal accrual, negative working capital and negligible debt. The financial risk profile will remain strong over the medium term. Liquid surplus was Rs 627 crore as on March 31, 2022.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BCCL and its wholly owned subsidiaries, Bajaj Bangladesh Ltd, Bajaj Corp International FZE and Uptown Properties and Leasing Pvt Ltd.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leading market position in the niche LHO segment: BCCL is a market leader with ADHO commanding over 64% market share (value terms) as on March 31, 2022. The brand positioning of ADHO is strengthened by high entry barriers given the strong brand loyalty among customers. The company has wide geographical presence and a distribution network covering more than 44 lakh retail outlets. BCCL has added two products to its portfolio: Bajaj Coco Onion Hair Oil and Bajaj Sarson Amla Hair Oil. In terms of market position, BCCL’s market share in Amla category rose to 3% (value terms) in the 4th quarter of fiscal 2022 as against 2.5% in Q4 of fiscal 2021. In overall hair oil segment, BCCL had maintained its market share at around 10.5% (value terms) as on June 30, 2022. The company has launched Almond Drops Serum in Oil and Almond Drops Argan Oil for e-commerce. It spends vigorously on advertising to increase its reach and has undertaken various initiatives to improve direct reach to consumers. Strong brand recall of Bajaj further aids in retaining dominance in the market.

 

Expanded product portfolio, strong distribution reach and focus on e-commerce is expected to support revenue growth of 10-15% in the medium term.

 

• Operating efficiency impacted by high input costs, however, remains at moderate levels: Efficient distribution and working capital management and premium product portfolio have resulted in comfortable operating efficiency and healthy return on capital employed (27.9% in fiscal 2022). Operating margin moderated to 19.8% in fiscal 2022 from 25-30% levels seen in the past on account of significant increase in raw material cost and high advertising expenses. The operating margin is expected at 14-16% in fiscal 2023. Advertising expenses (as a percentage of sales) were around 17% in fiscal 2022 and are expected to increase marginally to 18-20% over the medium term, led by higher media presence and investment in new products.

 

The company owns three manufacturing facilities besides access to third-party manufacturing units. Also, the working capital cycle is expected to remain healthy with immediate payments from distributors.

 

• Healthy financial risk profile: The financial risk profile is supported by nil debt, strong networth and low capital expenditure (capex). Liquid surplus of Rs 627 crore as on March 31, 2022, provides comfort to the financial risk profile.

 

Dividend payout was ~70% in fiscal 2022, compared with 53% in fiscal 2021 and 90-110% historically, and is expected at 40-60% of overall profit over the medium term. The company has healthy cash balance and scales up through internal accrual. It has comfortable capital structure and debt protection metrics.

 

Furthermore, pledge of promoter stake reduced to zero in December 2019 and is likely to remain nil in the medium term. The company did not have any exposure to group companies and is likely to maintain strong credit metrics over the medium term.

 

Weaknesses:

• High product concentration with high dependence on ADHO: ADHO, the company’s flagship product, contributes to 85-90% of revenue. The company has products in the premium hair oil category, Amla-based oils, and has launched a few products recently, including Bajaj Amla Aloe Vera Hair Oil and Bajaj Pure Coconut Hair Oil in 2021 and Bajaj Coco Onion Hair Oil and Bajaj Sarson Amla Hair Oil in 2022. Bajaj Amla Aloe Vera has been growing rapidly and has gained market share over the past few quarters. However, all the products excluding ADHO cumulatively do not have significant impact on the revenue. Growth in revenue has therefore been sluggish compared with peers. However, the company is focusing on diversifying its product portfolio and reducing dependence on ADHO.

 

• Inflationary pressure and subdued rural demand to keep margin under pressure in the short term: Profitability is expected to remain under pressure in the short-term owing to increase in key raw material prices (light liquified paraffin and refined mustard oil) and inflationary pressures impacting rural demand. Additionally, high advertising and promotional spends over the next 2-3 fiscals shall result in modest profitability.

 

• Exposure to intense competition: The FMCG industry remains susceptible to the risk of downtrading (shift from branded to unbranded) by consumers, especially in the rural markets. Bulk of the expenses are therefore directed towards advertising and promotion for BCCL to improve its competitive position. Intense competition in the FMCG sector will continue to exert pressure on the profitability of BCCL.

Liquidity: Strong

Liquidity will remain strong over the medium term, supported by the company's cash generating ability, substantial cash and marketable securities and no large capex plans, though most of the profit is paid out as dividend. Liquid surplus of Rs 627 crore as on March 31, 2022, is expected to be maintained around similar levels over the medium term. The company has nil debt and does not utilise its bank lines.

Rating Sensitivity Factors

Downward factors

• Significant erosion in BCCL’s market share resulting in reduction in scale of operations
• Decline in operating profitability from the current levels of 14-15% on a sustained basis
• Large, debt-funded acquisition weakening the key credit metrics
• Higher-than-expected dividend outflow impacting liquidity

About the Company

Incorporated in 2006 and part of the Shishir Bajaj group, BCCL is a leading manufacturer of LHO under the brand, ADHO. The company has presence in other hair oil categories through the brands Bajaj Brahmi Amla, Bajaj Coco Jasmine and Bajaj Kailash Parbat. It purchased the brand Nomarks in fiscal 2014 to enter the skin care category. Its manufacturing facilities are in Himachal Pradesh, Uttarakhand and Assam.

 

BCCL is listed on the Bombay Stock Exchange and the National Stock Exchange. As on June 30, 2022, 38% stake was held by the promoters and promoter group entities, and the remaining was with public. Of the total promoter holding, nothing is pledged.

 

As on June 30, 2022, BCCL’s profit after tax (PAT) was Rs 34 crore on operating income of Rs 249 crore, against PAT of Rs 49 crore on operating income of Rs 217 crore a year earlier.

Any other information: Not applicable