Bajaj: Dismal 3Q expectations

Just a few days away from declaring its 3QFY01 results, Bajaj Auto (BAL) is attracting buying interest on the bourses. Considering the company's dismal volumes for December 2000, and the continuous slide in the scooter market, the stock is definitely not gaining buying support on the back of an improvement in its operational performance.

As a result of the decline in volumes in the 3QFY01 by around 8% on a QoQ basis, we expect the 3QFY01 results to be worse off than the disappointing 2QFY01 performance.

In FY2000, scooters accounted for 52% of the total volumes of BAL, as compared to 33% in the first three quarters of FY01. On the other hand motorcycles (Japanese and Indian) accounted for 31% of volumes in FY2000 as compared to around 50% in the first three quarters of FY01. This change in sales mix though favourable in terms of the fact that the scooter industry is on a decline and the company has been quick enough to capture over 20% market share in motorcycles. However, this does not impact BAL's operating margins positively.

The company's other income too is set to decline in the 3QFY01, as the company has spend Rs 7.3 bn of its total surplus funds of Rs 38 bn (as of March 2000) on its buy back of shares. BAL has bought back 18.2 m shares (15% of the equity capital) at a price of Rs 400 per share.

Other income has played a very important role in BAL's performance in the past few years. Other income accounted for 52% of the company's profit before tax in FY98, 50% in FY99 and 62% in FY2000. Other income is expected to decline by around 25% in FY2001E. Though this is good for the company in the long term as its quality of earnings will improve but it will impact the company's performance in the short term.

The buying interest in the stock seems to have come up on the back of attractive valuations. On the current price of Rs 244, BAL is trading at 5.8x FY02E at an EPS of Rs 42.4. Its shares are currently trading at a 20% discount to its book value per share of Rs 304 for FY02E.

Besides, the company is taking a few positive steps which is probably bringing back investors to the stock. The company is gearing up for its new products launches in first quarter of 2001. These launches are to be made in traditional scooters and motorcycles. In scooters it is planning on a low cost no frill version so as to revive the low end of the scooter market.

However it is not very certain whether the expected revival in the scooter segment will happen soon as consumer bias towards motorcycles is currently very clear.

In the motorcycle segment, the company will launch a model in direct competition to Hero Honda's Splendor in the 100 cc segment. Splendor is the largest selling bike in the 100 cc segment with over 50% market share.