Bajaj Corp

• Bajaj Corp Limited is coming out with a 100% book building; initial public offering (IPO) of 45,00,000 equity shares of Rs 5 each in a price band Rs 630-660 per equity share.
• Up to 60% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, 10% would be available for the non-institutional bidders and the remaining 30% for the retail investors.
• The issue will open on August 2, 2010 and will close on August 4, 2010 for QIB bidders and August 5, 2010 for retail investors.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 126 times of its face value on the lower side and 132 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company.
• Compliance Officer for the issue is DK Maloo.

Profile of the company

Bajaj Corp was incorporated as a private limited company under the name of Bhaumik Agro Products on April 25, 2006 and got its present name on October 16, 2007. The company is promoted by Bajaj Consumer Care, Shishir Bajaj, Minakshi Bajaj, Kushagra Bajaj and Apoorv Bajaj. Earlier, Bajaj Sevashram (BSL) sold hair oils and other beauty products. Due to the Bajaj family settlement in 2001, the business was demerged to Bajaj Consumer Care (BCCL). BSL assigned the trademarks for all of its brands to BCCL, which subsequently licensed these brands to Bajaj Corp for 99 years from March 12, 2008.

The company began operating as Bajaj Corp in April 2008. The Trademark License Agreement granted it the exclusive right to use, manufacture, advertise, distribute and sell the products associated with these brands. The company manufactures and markets five major brands. The flagship brand, Bajaj Almond Drops, is the market leader in the light hair oil segment with 50% market share. Other product includes Bajaj Brahmi Amla, Bajaj Amla Shikakai and Bajaj Jasmine Hair Oil and oral care products under the brand name Bajaj Black tooth powder.

In addition, it also engages third-party manufacturers at Parwanoo, Himachal Pradesh for hair oils and Udaipur, Rajasthan to produce our oral care products. These third-party facilities have a combined installed capacity of 9 million litres per annum. As of December 31, 2009, the combined production capacity for all company and third-party operated production facilities was 83 million litres per annum.

The company manages a distribution network that comprises 4,300 distributors, or stockists, that sell to more than 1.49 million retail outlets located throughout India.

IPO Grading:

Crisil has assigned CRISIL IPO Grade ‘4/5’, indicating above average fundamental related to the other listed equity securities in India.

Proceed is being used for

• Promote the future products;
• Acquisitions and other strategic initiatives;
• General Corporate Purposes

Sr. No.	Expenditure Items	Total Estimated Expenditure (Rs Cr.)
1	Promote the future products	220
2	Acquisitions and other strategic initiatives	50
3	General Corporate Purposes	[]
	Total	[]

Industry Overview:

Out of the estimated Rs 1,61,000 crore FMCG market in India, hair care products make up about Rs 9,150 crore, or 8%, of the total, according the Nielsen Retail Audit Report. The 14% growth rate in the hair care industry is also slightly higher than the overall industry average of 13.4%. Shampoo and hair oils, including coconut oils, continue to be the key components of this segment. Recent growth in the hair oil industry has primarily been the result of volume growth due to increased distribution and higher per dealer off-takes.

The rural distribution campaigns by hair oil manufacturers and dealers have helped to greatly expand the geographic coverage of hair oil products into the rural parts of the country. In addition, average prices for hair oil products have risen from Rs 22.25 per 100 ml in 2008 to Rs 23.74 per 100 ml in 2009, according to the Nielsen Retail Audit Report. This price increase is reflective of the shift to higher quality branded products resulting from a more affluent Indian consumer population.

The Hair Oil Industry is divided into three segments; light hair oil, heavy amla hair oils and cooling oils. The light hair oil segment has experienced significant growth in recent years as consumers opt for lighter, more modern hair oil products. The light hair oil segment recorded sales of Rs 6,82.80 crore in 2009, according to the Nielsen Retail Audit Report. Sales growth was primarily the result of dealer expansion and higher throughputs resulting in higher volumes sold. An increase in average price has also contributed to higher sales value in 2009.

The heavy amla hair oil segment has seen strong growth in recent years. This is primarily an urban driven market and tends to be geographically concentrated in the northern parts of the country. The heavy amla hair oil segment recorded sales of Rs 739.10 crore in 2009, representing a growth rate of 9.6% from 2008, according to the Nielsen Retail Audit Report, while cooling oils have emerged as an important segment in the Indian hair oil market. It meant for cooling the scalp during the harsh summer months. The Compounded Annual Growth Rate (CAGR) of the category has been 20% over the last 5 years. The cooling oil category is now nearly Rs 600 crore in year ended December 2009.

Pros and strengths:

Market leader in light hair oil segment: The trademark license pact granted exclusive right to the company to use, manufacture, advertise, distribute and sell the products associated with the hair oils and other beauty products which helps the company in becoming India’s third largest producer of hair oils and the largest producer of light hair oils, capturing an estimated 49.5% of the light hair oil market in calendar year 2009, according to the Nielsen Retail Audit Report. In addition, the Bajaj name will help the company to grow its sales in the rural parts of India, an area critical to its future growth strategy.

Established distribution net work: The company established a strong distribution network in India and currently have 4,300 distribution stock points for direct distribution and 8,900 wholesalers for indirect distribution of our products. According to the the Nielsen Retail Audit Report, it is estimated that its products are sold in more than 1.49 million retail outlets across India, which is approximately 27% of the total hair oil outlets in India. The company’s distribution outlets are strategically spread across India in order to allow it to compete on a national scale.

Leading Brands:  Almond Drops is the company’s leading product brand and currently comprises approximately 92% of its net sales. Almond Drops is premium light hair oil containing almond oil and Vitamin E, which contribute to the product’s reputation for leaving users with healthier hair. Most hair oils which are packaged in plastic PET bottles, while Almond Drops is packaged in glass bottles, which preserves the product for a longer period of time even in high temperatures generally experienced throughout India. In addition, Brahmi Amla, the company’s key product in the traditional hair oil segment, has developed a loyal customer base since it began production in 1953.

Strong financial position: Bajaj Crop is a debt free company and has reported a profit of Rs 56.50 crore for the period ended December 31, 2009. The company’s strong financial position and operational results will provide it with the necessary working capital and access to banking and credit facilities, if required, to implement its growth strategy. The company’s ability to raise additional capital through first time borrowing should allow it to pursue inorganic growth opportunities and allow it to expand and enhance its existing product offerings and improve its future financial performance.

Risks and concerns:

Limited operating and financial history: The company was incorporated on April 25, 2006 and began operations in April 2008. Prior to that time, Bajaj Consumer Care (BCCL) and other Bajaj Group companies sold the brands that company is currently licensed to sell. The manner in which company operates its business and results of operations may differ from that of BCCL and other Bajaj Group. Company’s limited operating and financial history is not sufficient basis to evaluate its business.

The company depends heavily on ‘Almond Drops’: The company heavily depends upon its brand -- Almond Drops -- hair oil, which contributed 92.4% and 93.0% of the total sales and gross profit, respectively, for the nine month period ended March 31, 2010. Contribution from Almond Drops represented substantially all of the company’s operating profit for the year ended March 31, 2010. Any drop in the sales of Almond Drops or any other factor that negatively affects the product of the brand will adversely affect the company’s market share, business and financial performance.

The company operates in a highly competitive environment: The FMCG business is highly competitive. The hair oil market, in particular, consists of well-entrenched brands which have built up their brand equity over a period of decades. Barriers to new entrants are intense and require a significant amount of marketing expenditure to develop any new brand. Further, the highly competitive environment is expected to continue in FMCG markets, presenting the company with significant challenges in its ability to maintain its position in the light hair oil segment and market share. An increase in the amount of competition that company face could have a material adverse effect on its market share and sales.

Commitment to buy minimum quantity for product from third party manufacturers: At present, the company is outsourcing a significant portion of its production from the third party manufacturers under an agreement, where it committed to take a minimum quantity of cases per annum, at prices agreed between the parties, from time to time. In case of lower demand, the company will have to purchase the committed quantities which may adversely affect the financial performance of the company.

Foray into different line of business: the company has recently entered into an MOU to with Bajaj Infrastructure Development Company Limited, Bajaj Hindustan Limited and Teracon Construction (India) Private Limited to form a consortium in the nature of a SPV to participate in the tender for redevelopment of property at Nityanand Nagar Vibhag Four Cooperative Housing Society Limited. As per the terms of the MOU, BCL has undertaken to subscribe to at least 40% of the paid up capital of the SPV. The company do not have any prior experience in this field and may lose the investment of 40% of the equity capital of the special purpose vehicle (SPV) created to undertake the said project.

Outlook:

Bajaj Corp is one of India’s leading FMCG Company with major brands in Hair care category. With brands that have been in the market for eight decades, it is part of one of the oldest business houses of the country. India’s third largest producer of hair oils and the largest producer of light hair oils, capturing an estimated 49.5% of the light hair oil market in calendar year 2009. The company’s manufacturing facilities are located in tax-free zone and currently are exempt from paying excise duties for a period for 10 years from the financial year ended 31 March 2009 and from income tax for the first five years, followed by concessional income tax rate for the next five years.

On the concern side, the company heavily depends upon its brand -- Almond Drops -- hair oil, which contributed 92.0% and 92.7% of the total sales and gross profit, respectively, FY10, apart from this the company has a limited operating history that leaves a gap for analyzing the functioning and performance of the company in comparison with its peers. The company has also entered into a MoU for a re-development project and in case it doesn’t gets desired result it will lose 40 percent of the capital investment.The major part of the company’s strategy is to continue to grow by expanding the size and geographical scope of its existing businesses, as well as the development of new businesses. Any inability on its part to manage such growth could disrupt its business prospects and adversely affect its results of operations and financial condition.

The issue has been offered in a price band of Rs 630-660 per equity share, the issue will constitute 15.3% of the post-issue paid-up equity capital of company. The company intends to raise Rs 283.50 crore at lower end of price band and Rs 297 crore at higher price band.  The P/E based on the FY10 earnings of Rs 33.57 comes to 18.77x at the lower price band and 19.66x at the higher price band. Which is better that the nearest industry peers. The company has posted strong growth in its financial in last couple of years. The company's total income for FY 10 was Rs 334.86 crore and net profit Rs 83.91 crore compared to a total income of Rs 252.02 crore and net profit of Rs 46.92 crore in FY 09. The company is poised for growth and riding on the success wave of ‘Almond oil’ it is soon going to launching four products in the personal-care segment and will also evaluating inorganic acquisition opportunities. Also the company is a debt free company. Keeping all these factors in mind we will suggest going for the issue keeping a higher growth prospect in mind with long term prospective.

California Software Company’s board has decided to dispose of the labs business undertaking comprised of its investment in India and USA and business units in Chennai and Bangalore. The disposal will facilitate the company to focus and expand on its enterprise solutions and strategic investment divisions. The board gave its approval at its meeting held on July 31, 2010.

Further, the company has entered into Letter of Intent (LOI) with ALTEN EUROPE, SARL to dispose the Labs (product engineering services) business for a consideration not below Rs 100 crore.

The transaction is subject to necessary regulatory approvals and definitive structure to be agreed between the parties. Meanwhile, it is taking approval of the shareholders through postal ballot and has appointed R. Balasubramaniam, Practicing Company Secretary as Scrutinizer for conducting postal ballot.