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Bajaj Auto: Domestic drubbing takes toll - Views on News from Equitymaster

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Bajaj Auto: Domestic drubbing takes toll
Jan 16, 2009

Performance summary
  • Volumes nosedive 31% YoY during the quarter, leading to a 16% fall in topline
  • Operating margins come in marginally lower, falling by 0.2% during the quarter
  • Bottomline witnesses a steeper 23% YoY fall for the quarter as higher interest rates as well as extraordinary expenses take toll
  • Topline for the nine month period declines marginally on a YoY basis while bottomline suffers a 17% YoY fall


(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Units sold 713,135 493,748 -30.8% 1,898,819 1,753,885 -7.6%
Net sales 25,013 21,031 -15.9% 69,717 69,270 -0.6%
Expenditure 21,343 17,973 -15.8% 59,398 60,105 1.2%
Operating profit (EBDITA) 3,670 3,058 -16.7% 10,320 9,165 -11.2%
EBDITA margin (%) 14.7% 14.5%   14.8% 13.2%  
Other income 430 379 -11.8% 1,022 888 -13.2%
Interest (net) 19 90 367.4% 34 158 371.9%
Depreciation 418 319 -23.8% 1,326 985 -25.7%
Profit before tax 3,662 3,028 -17.3% 9,983 8,909 -10.8%
Extraordinary income/(expense) (515) (630) 22.5% (515) (1,241) 141.2%
Tax 1,013 755 -25.5% 3,118 2,425 -22.2%
Profit after tax/(loss) 2,134 1,643 -23.0% 6,350 5,243 -17.4%
Net profit margin (%) 8.5% 7.8%   9.1% 7.6%  
No. of shares (m) 101.2 144.7   101.2 144.7  
Diluted earnings per share (Rs)*         47.4  
Price to earnings ratio (x)*         10.0  

What has driven performance in 3QFY09?
  • One look at the table given below and it becomes clear that the 53% drop in domestic motorcycles volumes has hurt the company’s volume performance badly during the quarter. For one, the macroeconomic environment continued to deteriorate during the quarter and secondly, the company lost market share to industry leader Hero Honda. The 44% growth in motorcycle exports however helped stem the rot to a certain extent and reduced the overall volume damage to 31% during the quarter. The growth in motorcycle exports could be attributed to the company’s focus on developing select African markets. Similar story was repeated in the 3-wheeler segment as well with domestic sales plunging 23% YoY and exports sales improving 31% YoY during the quarter. As far as the near term domestic outlook for the company is concerned, worst seems to be behind it as an improvement in economic environment and the launch of as many as six new models in the motorcycles space could help maintain sales momentum.

    Sales break-up…
    Domestic 3QFY08 3QFY09 % change 9mFY08 9mFY09 % change
    Motorcycles 517,920 246,069 -52.5% 1,301,955 1,026,800 -21.1%
    Scooter/scooterette 4,189 2,552 -39.1% 18,092 8,373 -53.7%
    3 Wheelers 38,765 29,894 -22.9% 118,489 97,832 -17.4%
    Total 560,874 278,515 -50.3% 1,438,536 1,133,005 -21.2%
    Exports            
    Motorcycles 116,396 167,970 44.3% 357,919 507,349 41.7%
    Scooter/scooterette 211 520 146.4% 217 1,664 666.8%
    3 Wheelers 35,654 46,743 31.1% 102,147 111,867 9.5%
    Total 152,261 215,233 41.4% 460,283 620,880 34.9%
    Grand total 713,135 493,748 -30.8% 1,898,819 1,753,885 -7.6%

  • There was something to cheer for the company on the operating margin front. Although lower by 0.2% on a YoY basis, it represents a strong improvement from a QoQ perspective, indicating that lower commodity prices are finally finding their way into the company’s cost structure. Furthermore, an improved product mix and an intense vendor rationalization drive also helped the company maintain robust margins. Had it not been for the jump in other expenses, operating margins might have looked even better.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 18,637 15,214 -18.4% 50,963 51,683 1.4%
    % sales 74.5% 72.3%   73.1% 74.6%  
    Staff cost 846 762 -10.0% 2,553 2,597 1.7%
    % sales 3.4% 3.6%   3.7% 3.7%  
    Other expenditure 1,860 1,997 7.4% 5,881 5,824 -1.0%
    % sales 7.4% 9.5%   8.4% 8.4%  

  • Post the restructuring, the company was stripped of most of its cash and liquid investments and this explains the near fivefold jump in interest expenses as it may have had to resort to external borrowing to tide over seasonal fluctuations. This and higher extraordinary expenses on account of VRS payments outflow have further shaved off a few percentage points from the company’s profitability, resulting in a 23% drop in bottomline during the quarter on a YoY basis.

What to expect?
    At the current price of Rs 474, the stock is trading at a multiple of 4.2 times our estimated FY11 cash flow per share. The sudden and the steep fall in the company’s domestic motorcycles volume during the third quarter has put a question mark over its ability to meet our FY09 projections. While operating margins have come in as per our expectations, we will have to revise the topline number downwards. Having said that, the stock still remains an attractive bet from a medium to long term perspective.

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