AC Choksi Share Brokers Private Limited - Myiris.com
AC Choksi Share Brokers Private Limited - Myiris.com
AC Choksi Share Brokers Private Limited - Myiris.com
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A C <strong>Choksi</strong><br />
<strong>Share</strong> <strong>Brokers</strong> <strong>Private</strong> <strong>Limited</strong><br />
INITIATION REPORT | BAJAJ CORP LTD. Sept 09, 2011<br />
Investment Concerns:<br />
• Single Product Concentration: ADHO contributes approximately 92% of overall<br />
sales. Although, ADHO enjoys pricing power due to its dominant market share in<br />
LHO category any unhealthy <strong>com</strong>petitive activity can hamper its market share<br />
and/or premium margins. However, the <strong>com</strong>pany is in the process of reducing this<br />
risk by diversifying its product portfolio through new product launches.<br />
• Volatility in raw material prices: LLP, glass bottles and vegetable oils are major<br />
raw material for Bajaj Corp. For LLP requirement, the <strong>com</strong>pany enters into future<br />
contracts while glass bottles and vegetable oils are purchased at spot prices. During<br />
FY11, raw material prices increased significantly and continue to move up till<br />
Q1FY12. The <strong>com</strong>pany had already taken price increase to mitigate the impact of<br />
input cost inflation. However, if raw material prices increases more than our<br />
estimates, it may adversely affect Bajaj Corp by either affecting margins or volumes.<br />
This will lead to deviation from our estimates.<br />
• Unsuccessful new product launches: The <strong>com</strong>pany is in the process of launching<br />
new products. However, any unsuccessful launch will impact profitability of the<br />
<strong>com</strong>pany and will burn its cash reserves. Along with that, it can also hamper brand<br />
equity of the <strong>com</strong>pany.<br />
• Risk related to acquisitions: The <strong>com</strong>pany is on a look out for acquisition.<br />
However, Bajaj Corp is keeping a conservative stance to fund these acquisitions<br />
(largely through internal accruals). Recent acquisition deals in FMCG space<br />
happened at exorbitant valuations. Thus, it will be tough to identify a strong regional<br />
player at reasonable valuations. Further, after a successful acquisition, the <strong>com</strong>pany<br />
runs a risk of being unable to create market for a regional brand at national level.<br />
• Slowdown in consumer spending: During macro-economic slowdown and rising<br />
inflation consumers tend to reduce spending by down trading. Considering Bajaj<br />
Corp’s premium priced flagship product, a slowdown in consumer spending would<br />
be a risk to our earnings estimates and target price as consumers tend to down-trade<br />
in such a scenario.<br />
• Low Float: Bajaj Consumer Care Ltd. Holds 84.75% stake in Bajaj Corp. Thus,<br />
Bajaj Corp has low liquidity which makes stock vulnerable to steep downward<br />
movement in case of unfavorable news. However, as per new SEBI guidelines,<br />
promoters need to gradually reduce their holding to 75% or below, over a period of<br />
time. This mandate will address the low liquidity concern in the stock.<br />
A C <strong>Choksi</strong> Institutional Research 25
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