Rising Costs, Digital Rivals And Consumer Shift Will Crush Margins

Key Takeaways

• Heavy dependence on legacy products and slow innovation expose Bajaj to risks from changing consumer preferences and rising competition from agile personal care brands.
  
• Margin pressures are likely to escalate due to regulatory costs, input price volatility, and the need for increased spending to retain relevance and meet compliance requirements.
  
• Focus on core brand investment, portfolio diversification, expanded distribution, and disciplined innovation is set to boost both revenue growth and margin improvement.

Catalysts

Manufactures, markets, distributes, and sells hair care, cosmetics, toiletries, and other personal care products in India and internationally.

• The company faces increased risk from the accelerating consumer shift toward natural, organic, and chemical-free products, which threatens demand for its core legacy offerings such as Almond Drops hair oil; unless Bajaj meaningfully innovates, long-term revenue growth could stagnate or decline.
  
• Bajaj Consumer Care's heavy reliance on a single flagship product exposes it to significant concentration risk, and despite current advertising efforts, a failure to reverse long-standing market share losses or loss of relevance among younger and urban consumers could cause a material and sustained fall in revenue and earnings.
  
• The proliferation of digitally native and agile personal care brands taking advantage of rapid e-commerce adoption threatens Bajaj's market share, as the company's legacy status may lead to higher customer acquisition costs and eroding gross and net margins as it tries to defend its position.
  
• Intensifying regulatory scrutiny and mounting compliance burdens regarding personal care product ingredients and claims-in both India and key export markets-are likely to drive up operating costs and compress margins over time, especially as the company expands its product portfolio and geographies.
  
• Persistent input cost inflation and volatility in critical raw materials such as almond oil and copra, exacerbated by supply chain disruptions and climate change, are likely to increase COGS and further squeeze profitability, especially as margin-accretive cost initiatives may not fully offset these pressures.

Bajaj Consumer Care Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bajaj Consumer Care compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bajaj Consumer Care's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.8% today to 17.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹2.2 billion (and earnings per share of ₹15.78) by about August 2028, up from ₹1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 24.3x today. This future PE is lower than the current PE for the IN Personal Products industry at 60.1x.
• Analysts expect the number of shares outstanding to decline by 4.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.08%, as per the Simply Wall St company report.

Bajaj Consumer Care Future Earnings Per Share Growth

Risks

• Bajaj Consumer Care is focusing heavily on reviving and investing in its core ADHO (Almond Drops Hair Oil) brand with increased advertising, product extensions, and premiumization, which could lead to both higher revenue growth and improved net margins, contradicting expectations of a share price decrease.
  
• The company is actively diversifying its portfolio beyond the core hair oil segment, including growing brands like Banjara's and Vishal Personal Care in natural and herbal products, which are gaining popularity and increasing the addressable market, supporting long-term revenue and earnings stability.
  
• Distribution expansion initiatives like Project Aarohan are being rolled out systematically, already adding over 25,000 outlets with ongoing integration of southern and northern markets, which could boost volume growth and drive revenue higher as rural and urban reach improves.
  
• Management is implementing pricing optimization, SKU mix improvement, and expenditure control measures, which have already led to a sequential and year-on-year improvement in gross and EBITDA margins and are likely to further enhance net margins and profitability if sustained.
  
• The company is committed to innovation and prudent capital allocation, running an innovation center and planning disciplined, phased launches for new products to select high-potential channels, which could support top-line growth and mitigate risks of revenue stagnation.

Valuation

• The assumed bearish price target for Bajaj Consumer Care is ₹200.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bajaj Consumer Care's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹325.0, and the most bearish reporting a price target of just ₹200.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹12.2 billion, earnings will come to ₹2.2 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹223.75, the bearish analyst price target of ₹200.0 is 11.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.