Bajaj Corp Q3 FY2018

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“Bajaj Corp Q3 FY2018 Earnings Conference Call”
January 12, 2018





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Moderator: Anand Shah: Sumit Malhotra:

Bajaj Corp Limited January 12, 2018
Ladies and gentlemen, good day and welcome to the Bajaj Corp Q3 FY2018 earnings conference call hosted by Kotak Securities Limited. As a reminder, all participant lines will be in the listenonly mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing “*” then “0” on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Shah from Kotak Securities Limited. Thank you and over to you Sir!
Thanks. Good afternoon everyone. On behalf of Kotak Institutional Equities, I welcome you all to the Bajaj Corp Q3 FY2018 Earnings Conference Call. We have with us the senior management of the company represented by Mr. Sumit Malhotra, Managing Director, Mr. Sandeep Verma, President (Sales and Marketing), Mr. Dilip Maloo, Chief Financial Officer, and Mr. Kushal Maheshwari, Head Treasury. I would now like to hand over the call to Sumit for opening remarks. Thanks and over to you Sir!
Thank you Anand. Good afternoon and welcome to the conference call for declaration of the third quarter results for the Financial Year 2018. With me are Mr. Dilip Maloo, who is the CFO and Vice President Finance and Kushal Maheshwari, Head Treasury. I would like to take this opportunity to introduce Mr. Sandeep Verma who is the President (Sales & Marketing) to you all. Sandeep heads the marketing, handles all the sales vertical of this company as well as all the innovation initiatives being undertaken by the company.
The company has closed the quarter with a turnover of Rs.197 Crores. The growth in turnover vis-à-vis the third quarter of last financial year is 5.86%. The volume growth is 5.17% for the company. The volume of our hair oil brand has grown at 8.3% in this quarter in the domestic market. The EBITDA is at all time high of 35% and is at 69.1 Crores, which is a growth of 10.87% over EBITDA of Q3 of financial year 2017. Please note that while calculating the EBITDA, the budgetary support announced by the Government of India for units under the excise free zones in Uttarakhand, Himachal, and Assam has been accounted for.
The PAT and PBT for the quarter is 55.17 Crores and 70.15 Crores respectively. Keeping the increase in operating profit in mind, the company has announced an all time high interim dividend of Rs.12 per share. Though business is settling down post the implementation of GST there are still some issues relating to claiming of refunds, filing returns and also GST forms related to TRAN-2.
In addition to this the growth figure on a Q over Q or a YoY basis are misleading. To put into perspective even though the growth in the turnover is 5.86%, this is not the like-to-like comparison. The primary reason for this is that the sales value last year has been netted after a 14% VAT impact; however, this year the tax impact if GST misses largely 18% for our company. If the turnover is compared on a like-to-like basis the growth for the company in this quarter is 10.08%.

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Bajaj Corp Limited January 12, 2018
This is led by a growth in domestic business of 13.38%. The growth in total hair oil has slowed down in the third quarter as against the volume growth of 6.7% in the second quarter. The offtake growths are dropped to 3.6% in this quarter.
For the light hair oil segment the growths in offtake volume for this quarter is just 2.3%. As against these segmental growth Bajaj Almond Drops has grown as 3.7% by volume. As a result of this the market share of Almond Drops and light hair oil as well as total branded hair oils has gone up during this quarter. The growth in the rural areas has remained weak. In the LSO segment, the rural volume growths have dropped to just 0.5% as against expectations after the good monsoon, the revival of rural offtake are still not been witnessed in the hair oil segment. While domestic sales are showing definite signs of it recovery, the business outside India is still a cause of concern. Domestic, general trade business is showing a 12.3% growth in business after GST a neutral scenario.
Modern trade has shown a very good Q3 FY2018 growth, which is 14.25%. During this quarter the CSD business has shown a marginal decline of 2.7%, which is a significant improvement over the large trend witnessed in the second quarter. Though the trend in CSD sales is positive, we cannot yet be sure whether there is a complete recovery on this front. The sales in the IT sector are a major cause of concern. There are strains in offtake in MENA as well as in Nepal, which are our largest markets outside India.
Part of this decline can also be attributed to infrastructure issues related to manpower and distribution setup in these two areas. Our initiatives in improving our reach as well as efficiency in sales systems are continuing to yield benefits. Our direct distribution has gone up with an induction of 300 sales representatives. The success of our project Saathi has prompted us to implement the same in our rural task force as well as the modern trade merchandising team.
In both these areas we are sure to see efficiency improving post the stabilization of automation initiative. The innovation centre is now working full stream and the innovation pipeline is becoming impressive day-by-day. The next project launch should happen in January 2018 post which we aim to launch a product every quarter in an effort to increase the efficiency of other support functions, we have undertaken departmental orders for QC production, IPNHR for the same we have employed the services of well known consultants such as E&Y, PwC, etc., behind this exercises to help identify areas that need to be improved on.
Once the recommendations are fully in place we should see visible signs of efficiency in these departments also. The increasing price of crude has cost us a strain in the cost of our raw and packaging material. The largest increase in cost is for LLP as against a price of Rs.46.37 per kg the price in this quarter is Rs.61.22. Even after considering the input tax credit the equated price is still 52.81% per kg for LLP, which is an increase of 14%. The current price has further increased to 72% now.
There is however a marginal reduction in the price of refined mustard oil this quarter against a price of 83.97 per kg last year our RMO, refined mustard oil is down to 80.52 per kg post input
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Moderator: Manoj Menon:
Sumit Malhotra:
Manoj Menon: Sumit Malhotra:

Bajaj Corp Limited January 12, 2018
tax credit the landed rate is 76.69 which is a 8.6% reduction. We believe that the crude oil prices will not fall in the foreseeable future hence we have got heavily during the last quarter, currently our LLP stocks will cover the March 2018.
Nomarks is finally showing visible results in the pilot project we started in UP. During the third quarter, Nomarks has shown a 122% growth in turnover in UP, this has happened because of the investment in distribution as well as adverting. As a result of this the brand has grown by 101% in the domestic market; however, the decline in the international business has dampened the growth in turnover for the company to just about 30% odd; however, these results are actually enthused us and we plan to speed up the extension of the pilot project to other states in the coming quarter. We are now open for questions.
Thank you very much. We will now begin with the question and answer session. Ladies gentlemen we will wait for a moment while the question queue assembles. We have the first question from the line of Manoj Menon from Deutsche Bank. Please go ahead.
Team, very good morning and first of all a very Happy New Year to all of you. Three baskets of questions actually here; first of all actually I want to welcome Sandeep to the call. I presume this is the first call, which Sandeep is attending. The first question is we saw this Vision 2020 the question here is 2020 is pretty much here actually just about 18 months from today, so why not 2025 is there any specific thought process or would you be able to quantify some of the targets we will have for 2020?
Manoj, good question. I think you know that we have been under the process of change for the last two years and the reason why we have put 2020 as the first milestone is that we believe that the first visible change in the way this organization’s works and structure will be visible by 2020 because like I have been pointing out in my concall we have been restructuring, getting good people, capable people around departmental heads and bringing systems within this organization, so the first visible change we have targeted and that is why Vision-Mission 2020 and not 2025 or 2030 is that we will be able to go for the next level of change post the stabilization in 2020.
Understood, so you may or may not want to talk about in the call, but would you able to quantify some of the targets for 2020, anything that you have in mind even if it’s directional?
I think directionally we would look at a much more diversified, in fact in the vision itself and the mission itself we have targeted and said that we want to become a complete FMCG company, you might ask are you not a complete FMCG company? The thing is from a largely hair oil company we would like to move into a diversified FMCG company and the first step should be visible by 2020 that is the whole thought behind the vision and mission that has been formulated. We have now started pushing and sort of populating this to the rest of the company and through townhall and vision, mission workshops we are starting to get the whole team thinking the same way.

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Manoj Menon: Sumit Malhotra: Manoj Menon: Sumit Malhotra:

Bajaj Corp Limited January 12, 2018
Understood, just two questions and I will come back in the queue. One your commentary about industry growth does appear to be slightly different from what we have heard from the other companies, which operate in the hair oil space over the last two, three months, so my sense actually was that segments like coconut oil and even Amla from an offtake point of view and I am not referring to the Nielsen numbers, at least what these companies are experiencing, but kind of accelerated whereas your commentary appears to be saying that over to DHO as well as your segment has decelerated. So how do I think about what is happening to the industry that is point number one? Point number two, what specifics to the light hair oil business also in the context of sources of growth and how that has changed the short term and the medium term on both?
Manoj I think we are both talking about different sets of figures because obviously since we have the first declare the results we do not have the turnover or growths or declines of various other companies. The figures that we are speaking from is the Nielsen offtake figures and like I have been trying to sensitize that they can always be a difference between Nielsen and sales figures because one is offtake, the other is primary sales. Having said that yes Amla is perhaps continuing to grow faster than the rest of the category. In terms of coconut, I think value growths are good, volume growth are tapering down but the overall statement that I made in my call was that the rural market for all of these are actually slowing down and what we have done is we have in the latest presentation that you see we have always shown you, our market share is going up sequentially. So if we are gaining market share it gives you an idea of what is happening to the other sectors in the hair oil space.
Understood and just lastly on the core business itself, which is the Almond Drops Hair Oil, how do I think about the changes to the sources of growth over the last three, four years etc., so how do you see this? I mean so let me frame a little differently also so is it that we need a big macro improvement push needed for Almond Drops to now get back to let us say double digit volumes where we are today or do you believe that the internal disruptions if I have to use the word in the last couple of years whether it is people or processes itself has contributed to the slowdown and now that both that have stabilized you will be able to drive growth significantly without freely waiting for a macro push into let us say double-digit territory over the next 10 to 24 months?
I would like to attribute the slowness to the sales process that we are implementing. Yes sales do become disruptive factor for a small period, but I do not think it would be right for me to sort of pass all the negativity or the slowdown to internal. It is largely to do with the macro. There are three or four things you need to know. One is that what was movement from pure coconut or the unbranded hair oil to value added has actually speeded up over the last few years, but rather than the premiumization, which is where are strategy was for Almond Drops, a lot of this conversion is actually going to the low cost Amla space and quarter-after-quarter you had noticed the commentary is the fastest growing segment is now Amla and not no longer light hair oil, which shows that it is basically the movement was low cost is now faster than it ever was before. I think the large part of this is because of the slowdown in the rural areas and therefore my commentary was that we are all waiting for rural to start coming back to speed because if that comes I think

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Manoj Menon: Sumit Malhotra:
Manoj Menon: Moderator: Abneesh Roy: Sumit Malhotra: Abneesh Roy: Sumit Malhotra:
Abneesh Roy:

Bajaj Corp Limited January 12, 2018
all the conversions from unbranded which is largely rural to value added will speed up even further.
Understood, so would it be correct to perform an hypothesis that if the low cost Amla let us start reaching a profitability a little more would that be a lesser headwind for you?
Again this is outside my control, but the fact is since crude prices and LSP are going up so steeply. The margins for everyone would be a problem and specifically so for the low cost Amla, so how they manages is something, which we will know in the coming month but yes that will be a strain on the low cost Amla, but I think more than profitability it is the volume growth that need to come back because like I said that if you notice the difference between the volume and value have shifted more than we expected this quarter and that is because the sachets have not grown whereas the bottles which are largely urban and much better profitability for us have grown much faster. This will shift once the rural area start growing again.
Thank you very much and all the very best.
Thank you. The next question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
My question is on the margins front crude related inputs are going up, you have plans for much higher pace of innovation, so how do you see your advertising spends and your EBITDA margins, you have managed that quite well even in this quarter, but are you willing to sacrifice the margins to get more volume growth and new product success?
I think I have said that over and over again. I believe EBITDA margin of 30% to 35% is very high and I do not think we will be able to maintain that in the long-term. We will not maintain it because the advertising spends may need to go up, but if it comes to advertising versus EBITDA I think I would move towards the advertising rather than maintaining a 30% or 35% EBITDA.
You have spelled it out earlier, but my question is there specific number because if you have one innovation every quarter, how much of spend, lot of companies give that number and they will apportion a 10% of the profit and the innovation?
Over the last years, I have always been telling you that I do not give guidance, so I would not give you guidance in terms of numbers but logically if new launches happen spells on A&P will go up and if you cannot manage cost savings in the middle EBITDA would go down. Having said that we are looking at product launches which are fairly high gross margins. So a lot of the launches will be able to sustain themselves through the internally generated funds with a little bit help from Almond Drop sale.
Second question is on the UP, this test pilot seems to have been successful, so what is the plan now on role out to other states and this very high growth if you could talk about dealer level activity either say in terms of commissions or incentive, is there something extra in terms of that

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Sumit Malhotra:
Abneesh Roy: Sumit Malhotra:
Abneesh Roy: Moderator: Percy Panthaki: Sumit Malhotra: Percy Panthaki: Sumit Malhotra:

Bajaj Corp Limited January 12, 2018
dealer commission or incentive which is driving this or is it largely the selling part and the product differentiation part, what is helping this growth if you could take us through that?
Abneesh, obviously it is not single focus that is only advertising or only distribution. Like I said that the UP experiment is about taking Nomarks cream into chemist outlets. Now like you would know and all of you cover consumer and pharma also, the discount of the margins for chemist or chemist driven distribution systems are different. For example, in our case we have 5.5% margin for our distributors, the pharma guy has 10%, we have 10% margin for retailers, they have 20% so that change has also been implemented. The Nomarks sale into chemist is at a different margin structure. The only thing we have changed in the credit. We still do not give the credit for pharma and distribution system in UP. Apart from that in terms of the sales force it is totally different, the managers are different, advertising you have seen is largely focused onto UP and SSM belt.
Next question and last one on modern trade, your growth was 20% last quarter, this quarter it is 14%, so how do you see growth here and second you said on CSD the growth is improving gradually, so is it now back on track, most of the issues have resolved and so growth would come back next year do you see that?
For CSD like I said in my opening address, I am not too sure because the changes are still happening in CSD in terms of the stocking pattern in terms of closing smaller URCs in terms of accumulating in reducing the number of depots and all that. So even though the growth is nearly flat now I am not 100% sure that the growth will come back next quarter. In terms of modern trade, the growth you said it was 20% and now down to 14% but I think you should look at the base effect also because last year in the year of demonetisation Q3 the two areas that grew were modern trade and international business, so on a higher base we have still grown at 14% which is the fastest among all sales verticals in this company.
That is all from my side. Thank you.
Thank you. The next question is from the line of Sameer Gupta from India Infoline. Please go ahead.
This is Percy here. I wanted to start with housekeeping question. This 107 million of operating income that you have booked that is tax refund. If I were to understand correctly that is just accrual right you have not received anything from the government?
No you are right.
And secondly in the first quarter you mentioned 64 million and now it is cumulative 107, so this quarter it is only 43 million is that correct?
No that is not correct. The reason why I had mentioned that not taken into account was that the ways of the refund or budgetary support was supposed to come to us was undergoing changes like I told you last time initially they have said that we would get back 58% of CGST. Now what
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Percy Panthaki: Sumit Malhotra: Percy Panthaki: Sumit Malhotra: Percy Panthaki:
Sumit Malhotra: Percy Panthaki: Sumit Malhotra: Percy Panthaki: Sumit Malhotra:
Percy Panthaki:
Sumit Malhotra:

Bajaj Corp Limited January 12, 2018
has happened is we will get 58% of CGST minus input tax credit that you have taken. So 6.4 has actually dropped to 5.2% and 5.2% is for the second quarter and the remaining is for third quarter.
Going forward henceforth we should take somewhere in the region of about 45 to 50 million a quarter approximately?
It depends of the turnover.
At the current turnover it should be about 45 to 50 million?
It should be more than 50 million because the fourth quarter is always the largest quarter for us.
Fair enough. Sir secondly just wanted to probe a little deeper on this rural slowdown that you have been talking about. So is it a broad based issue in terms of demand across FMCG categories in rural or is it more sort of accentuated in the categories that you would be in?
I would say that it is across category in FMCG. Non-FMCG categories are showing different kind of results like you can turnaround and say what is happening on scooters and cars.
Yes that I understand I was talking mainly about broad based when I was talking I meant FMCG only.
In FMCG yes I think it is across.
So what do you think is needed for this rural demand to pickup?
Of course another good monsoon is definitely needed. I think subsidy to work from the government to rural growth is required but I personally believe that the larger growth will come once infrastructure projects pickup because there are a lot of the rural workers actually survive on salaries or employments on these infrastructure projects once that picks up I think the overall economies will pickup faster.
Okay and also wanted to touch upon your gross margins, they have expanded despite you passing on the GST benefits and despite inflation in the input cost. I know that refined oil is down, but the quantum of LLP inflation is more than the quantum of benefit on refined also so your overall clog basket has moved up. Your GST benefits have passed through there is no additional price increased you have taken so how is the gross margin actually expanding?
I think it is a matter of mix also because again like I said that the SKUs that are not really growing is sachet and in the whole scheme of things that is second lowest gross margin there. If the growth is coming out of the larger SKUs like 300, 500, your margins are bound to expand.

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Bajaj Corp Q3 FY2018