Dear Readers,

After a long wait, Bajaj Corp has finally made its first acquisition and based on the available details, it does seem like a good strategic fit.

Disclaimer: We ourselves and our members are invested in the stocks discussed below. Also, please do not construe the below note as buy/sell advice and do carry out your own due diligence before buying/selling the stocks.

Few important points about the brand:

  1. As per the details shared by Nielsen, NOMARKS is the second largest brand with 12% market share in Rs 342 crore anti marks/anti-blemish category which itself is growing at ~25% per annum.
  2. NOMARKS created the anti-marks category in skin care segment in 2000 and reported good growth till 2009-10, however the sales for the last 3 years have been stagnant as OA could not expand its distribution reach and didn’t advertize as well.
  3. At the moment NOMARKS is available in ~1.5 lakh outlets with 41% of sales from chemists. Cream is the largest selling product, followed by face wash and soap.
  4. In the anti-marks category, Himalaya Face wash is the largest selling brand with ~40% market share.

Few important points about the deal:

  1. The company has acquired the NOMARKS brand from Ozone Ayurvedic (OA). The company has not acquired the manufacturing facilities or the employees; it has only acquired the trademark, brand, etc.
  2. Bajaj Corp will start marketing the product in the next 1 month or so, while as per the agreement OA will manufacture the products for Bajaj Corp for the next 1 year. Bajaj Corp can seek 6 months extension, if required.
  3. The company has not disclosed the amount at which the acquisition has been made, however economic times has estimated the deal size to be ~150 crores.
  4. The market share details shared by Nielsen does not include sales to CSD (Canteen stores), exports, etc and is based on MRP, however the net sales is expected to be in the range of 40-50 crores (not confirmed by the management in the con-call).
  5. As per the management, the Gross margin profile of the product is similar to Bajaj Corp’s current product line i.e. 55-60%.

How does Bajaj Corp intend to grow the brand?

  1. As per the management, up till now NOMARKS was handled as a pharmaceutical product with major sales from chemists; however Bajaj Corp intends to pitch it as FMCG product with wider availability at retail stores.
  2. The first few steps would be to expand the distribution network and advertize the product as it was being done 3 years back and before. Bajaj Corp will make the product available in 6 lakhs outlets from 1.5 lakhs in a very short period as 6 lakh outlets are directly under its control through stockists and sub-stockists.
  3. It is important to note here that Bajaj Almond Drops is available in ~24 lakh outlets and therefore the potential for expansion in distribution network is immense.
  4. The management also intends to launch new SKUs (stock keeping units) which are more affordable.

What changes do we expect from the above acquisition?

We like the fact that company has started with a small acquisition that can be funded entirely from internal accruals and also find the brand a strategic fit in terms of size, customer profile and distribution and marketing channels.

If the company is able to execute well, the brand does seem to have good long term prospects and shall also help Bajaj Corp diversify its revenue stream from Bajaj Almond Drops alone, which is also the reason for its lower valuations in comparison to other FMCG companies.

In the short run, at least in FY 14 we expect the profit growth to be muted. Earlier, we were expecting the company to close FY 14 with a net profit of 200-205 crores, however we would now like to lower our estimates to 170-180 crores on account of the following reasons. It is important to note here that management has not shared any numbers and therefore the below points are our assumptions:

  1. Assuming the deal size to be 150 crores, there could be an addition of 10-15 crores in amortization cost
  2. Secondly, lower other income on account of some portion of surplus cash being used to fund the above deal.

Overall, we remain positive about the long term prospects of the company and would suggest you to continue holding the same.

Best Regards,
Ekansh Mittal
http://www.katalystwealth.com/
Ph.: 0120-4109766, Mob: +91-9818866676
Email: info@katalystwealth.com