Rating Rationale
November 13, 2018 | Mumbai
Bajaj Corp Limited
'CRISIL A1+' assigned to CP
 
Rating Action
Rs.100 Crore Commercial Paper Programme CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper programme of Bajaj Corp Ltd (BCL).
 
The rating reflects 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.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of BCL and its wholly owned subsidiaries ' Bajaj Bangladesh Ltd, Bajaj Corp International FZE and Uptown Properties and Leasing Pvt Ltd.

Key Rating Drivers & Detailed Description
Strengths
* Leading market position in the niche LHO segment: BCL is a market leader in the Rs. 1,800 crore LHO segment with its brand ' BADHO - commanding 60% market share (volume terms), as of September 2018. The LHO segment, in turn accounts for 16%, of the Rs. 11,300 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 segment and increasing penetration in rural markets. Furthermore, 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 2018, the urban and rural segment accounted for 60% and 40%, respectively of BCL's revenues. The company registered revenue of Rs 420 crore for the first six months of fiscal 2019, a year-on-year growth of 5% led largely by improved rural demand.  BADHO will continue to be the dominant brand in the LHO category over the medium term.
 
* Strong operating efficiency: BCL's strong operating efficiency emanate from its efficient distribution system, large economies of scale and premium product portfolio, leading to strong operating profitability and return on capital employed (59% in fiscal 2018). Despite volatility in raw material prices, BCL maintained its healthy operating margin of over 28% in the past 5 fiscals through 2018. The raw material-to-sales ratio has also consistently improved over the years to 33% for fiscal 2018 led by improving cost efficiency and premium nature of products. Furthermore, the company owns four manufacturing facilities besides third party manufacturing facilities.  Its operating margin is expected to remain stable at about 30% over the medium term, dominated by BADHO. Further, the working capital cycle is moderate with immediate payments from distributors.

* Healthy financial risk profile: BCL's financial risk 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 381 crore as on September 30, 2018.
 
The company's liquidity is supported by the company's cash generating ability, though most of the profits are paid out as dividend. Further the company has been debt free, and has enhanced its liquidity position as on September 30, 2018 at Rs.381 crore with the proceeds being invested mainly in debt mutual funds and high rated corporate bonds.
 
With increase in cash generation and absence of any large capital expenditure/acquisitions since fiscal 2014, BCL has steadily increased its dividend pay-out.
 
The management plans to grow businesses organically as well as inorganically. Nevertheless, CRISIL expects BCL 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 in the past and the same is expected to continue in future.
 
Weaknesses:
* High product concentration and revenue dependence on BADHO: The company's flagship, BADHO accounted for over 90% of revenues in fiscal 2018, and has been BCL's mainstay for over a decade. BCL 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 remain 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, and have not met with similar success as BADHO.
 
Reliance on a single product category has therefore resulted in BCL's revenues witnessing slower growth compared with most of its peers in the FMCG space. Furthermore, growth has was subdued in fiscals 2017 and 2018, because of the impact of demonetisation and goods and services tax rollout, respectively.  
 
* Exposure to intense competition: The Indian FMCG industry has both organised and unorganised players across various segments and product categories. BCL has to consistently incur high advertisement costs to increase its competitiveness position. Its advertisement to sales ratio of about 15% is higher relative to its peers in the industry. CRISIL believes that the intense competition in the FMCG sector will continue exert moderate pressure on players, including BCL.

About the Company

Incorporated in 2006 and part of the Shishir Bajaj Group of companies, BCL 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 skin care category. Its manufacturing facilities are in Himachal Pradesh, Uttarankhand and Assam.
 
BCL is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2018, 66.86% stake was held by promoters and promoter group entities, 23.46% held by foreign portfolio investors and rest by others. Of the total promoter holding, 63.10% is pledged.
 
For the six months ended September 30, 2018, BCL's profit after tax (PAT) was Rs.105 crore on operating income of Rs 434 crore against a PAT of Rs 105 crore on operating income of Rs 401 crore for the same period previous year.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Crore 827.13 796.55
Adjusted Profit After Tax Rs. Crore 211.08 218.24
Adjusted PAT Margins % 25.5 27.4
Adjusted Debt/Adjusted Networth Times 0.03 0.03
Interest coverage Times 232 296

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 Crore)
Rating Assigned with Outlook
NA Commercial Paper Programme NA NA 7-365 days 100 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper Programme ST  100.00  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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