Rating Rationale
November 26, 2019 | Mumbai
Bajaj Consumer Care Limited
Rating Reaffirmed 
 
Rating Action
Rs.100 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Bajaj Consumer Care Limited (BCCL), formerly named as Bajaj Corp Ltd.
 
The rating continues to reflect the company's leading market position in the niche light hair oil (LHO) segment, strong operating efficiency, and a healthy financial risk profile marked by low reliance on debt. These strengths are partially offset by high product concentration and revenue dependence on Bajaj Almond Drops Hair Oil (BADHO), and intense competition in the fast-moving consumer goods (FMCG) industry.
 
Operating income has grown 11% to Rs 918 crores in fiscal 2019 and by 5.5% to Rs 444 crores in the first six months of fiscal 2020, supported by its established market position in the hair oil segment and entry barriers arising from high brand loyalty amongst  customers. Revenue growth is expected to be modest at about 6-7% over the medium term, backed by the company's high focus on advertisement and branding initiatives in light of rural demand slowdown and downtrading (transition from branded to unbranded). Operating margin is expected to decline marginally over the medium term from 30% in the past few years, mainly due to high advertisement costs.

Analytical Approach

For arriving at its ratings, CRISIL 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 its brand ' BADHO - commanding 64% market share (volume terms), as of September 2019. The LHO segment, in turn accounts for 16%, of the Rs. 12,781 crore overall hair oil segment, which is dominated by coconut hair oil.

BADHO's brand positioning is strengthened by high entry barriers given the strong brand loyalty amongst existing customers. BADHO has outperformed the overall hair oil industry in most recent years riding on the shift of consumers to LHO from traditional coconut hair oil and increasing penetration in rural markets. However, the demand from rural segment is expected to slow-down over the medium term in light of the current economic environment. The advertisement and selling expenses are expected to increase and strengthen the offtake over the medium term. Further, the company has strong geographical diversity through its pan-India distribution network of over 9,000 distributors covering nearly 40 lakh retail outlets, and robust advertising and selling efforts. Consequently, BADHO's market share has improved to current levels from about 52% in fiscal 2012.

In fiscal 2019, the urban and rural segment accounted for 60% and 40%, respectively of BCCL's revenues. Revenue was Rs 444 crore for the first six months of fiscal 2019, a year-on-year growth of 5.5% led largely by urban demand.   BADHO will continue to be the dominant brand in the LHO category over the medium term.

Strong operating efficiency: BCCL's strong operating efficiency emanate from its efficient distribution system, large economies of scale and premium product portfolio, leading to strong operating profitability (29.9% in fiscal 2019) and return on capital employed (62% in fiscal 2019). Despite volatility in raw material prices, BCCL has maintained its healthy operating margin of over 29% in the past five fiscals through 2019. The raw material-to-sales ratio has consistently improved over the years to 33% (fiscal 2019) from 38% (fiscal 2015) due to the implementation of cost control measures.  Further, the company owns four manufacturing facilities besides access to third party manufacturing units.   Moreover, the working capital cycle is expected to remain moderate with immediate payments from distributors.

* Healthy financial risk profile: Financial profile is supported by its near debt-free position, healthy net worth, minimal capital spending needs, and not withstanding high dividend pay-out. It also maintained strong liquidity of Rs 266 crore as on September 30, 2019, mainly invested in debt mutual funds and bank fixed deposits. The company also has healthy adjusted networth of Rs 424 crore as on September 30, 2019.

With increase in cash generation and absence of any large capital expenditure (capex)/acquisitions since fiscal 2014, BCCL has steadily increased its dividend pay-out.

The management plans to grow businesses organically as well as inorganically. Nevertheless, CRISIL expects BCCL will maintain a prudent funding policy, and maintain its credit metrics at healthy levels, though there could be temporary deterioration in key credit metrics in the event of material debt funded acquisition. The nature of acquisition and extent of debt funding will nevertheless, remain key monitorables.

The company has not had any exposure to group companies or promoter holding companies in the past and the same is expected to continue.

Weaknesses
* High product concentration and revenue dependence on BADHO: The company's flagship, BADHO accounted for over 90% of revenues in fiscal 2019, and has been BCCL's mainstay for over a decade. BCCL has introduced new products, acquired brands and launched products via brand extensions to lower its dependence on BADHO. For instance, the company acquired Nomarks in fiscal 2014 for Rs 140 crore. However, its contribution continues to be modest as the growth has remained flattish in recent years. The contribution of products such as Nomarks, Bajaj Coco Jasmine Hair Oil, to revenues and profits are yet to be meaningful.

Reliance on a single product category has therefore resulted in BCCL's revenues witnessing slower growth compared with that of peers.  Further, revenue growth was up 5.5% in first half of fiscal 2020, mainly due to high realisation in terms of value though volume has degrown by 3.1% in the same period . 

* Exposure to intense competition: The Indian FMCG industry has both organised and unorganised players across various segments and product categories. BCCL has to consistently incur high advertisement costs to increase its competitiveness. Its advertisement to sales ratio of about 17% is higher than peers.  The ratio is expected to increase further to about 18-19% over the medium term. CRISIL believes that intense competition in the FMCG sector will continue to exert moderate pressure on players, including BCCL.

Liquidity: Strong
Liquidity is strong, supported by the company's cash generating ability, though most of the profits are paid out as dividend. Liquid surplus of Rs 266 crore as on September 30, 2019 is expected to remain at similar levels over the medium term.  This is largely invested in debt mutual funds and bank fixed deposits. The company has negligible debt and does not utilise its bank lines. Liquidity is expected to remain strong, supported by healthy cash generation, substantial cash and marketable securities, and no large capex plans, over the medium term.

Rating sensitivities factor
Downward Factors

* Decline in operating margin below 26%, 
* Large, debt-funded acquisition, capex, leading to deterioration in key credit metrics
* Higher-than-expected dividend outflow or support to group companies impacting liquidity.
About the Company

Incorporated in 2006 and part of the Shishir Bajaj Group of companies, BCCL is a leading manufacturer of LHO in consumer packs under brand BADHO. The company also has presence in other hair oil categories through brands Bajaj Brahmi Amla, Bajaj Coco Jasmine and Bajaj Kailash Parbat cooling hair oil. The company purchased Nomarks brand in fiscal 2014 to enter into the skin care category. Its manufacturing facilities are in Himachal Pradesh, Uttarankhand and Assam.
 
BCCL is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2019, 60.52% stake was held by promoters and promoter group entities, 23.92% held by foreign portfolio investors and rest by others. In October 2019, the promoters sold 22% of their stake and the debt raised by pledge of BCCL's shares was paid off. There is no pledge on promoter's holding in BCCL as on date.
 
For the six months ended September 30, 2019, BCCL's profit after tax was Rs 113 crore on operating income of Rs 461 crore as against Rs 105 crore and Rs 434 crore, respectively, for the same period last year.

Key Financial Indicators
Particulars Unit 2019 2018
Operating income Rs crore 918 827.13
Adjusted profit after tax Rs crore 222 211.08
Adjusted PAT margin % 24.1 25.5
Adjusted debt/Adjusted networth Times 0.06 0.03
Interest coverage Times 249 232
 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)
Rating assigned
With outlook
NA Commercial paper programme NA NA 7-365 days 100 CRISIL A1+
 
Annexure - List of entities consolidated
List of Subsidiaries % of shareholding Consolidation
Uptown Properties and Leasing Pvt Ltd 100% Subsidiary
Bajaj Bangladesh Ltd 100% Subsidiary
Bajaj Corp International (FZE) 100% Subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      13-11-18  CRISIL A1+    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation

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