Bajaj Auto: 'Discovering' a new rhythm - Views on News from Equitymaster

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Bajaj Auto: 'Discovering' a new rhythm

Jan 24, 2005

Performance Summary
Bajaj Auto announced its 3QFY05 results last week. While operating profits declined in 3QFY05, helped by higher other income, net profit grew at over 4% (excluding extraordinary adjustments) in the same period. The main reason for the decline in margins is due to higher input costs and initial marketing expenses incurred towards the newly launched motorcycle. The important aspect to notice is the volume growth, which has gained significant momentum post the launch of the new model.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 13,101 16,057 22.6% 36,332 42,801 17.8%
Expenditure 10,581 13,645 29.0% 30,250 36,150 19.5%
Operating profit (EBDITA) 2,521 2,412 -4.3% 6,083 6,651 9.3%
EBDITA margin (%) 19.2% 15.0%   16.7% 15.5%  
Other income 618 869 40.6% 2,892 2,816 -2.6%
Interest 1 3 170.0% 9 5 -41.2%
Depreciation 462 468 1.2% 1,334 1,393 4.5%
Profit before tax 2,676 2,810 5.0% 7,632 8,068 5.7%
Extraordinary income/(expense) (95) (163) 72.9% (454) (327) -28.0%
Tax 770 820 6.5% 2,010 2,470 22.9%
Profit after tax/(loss) 1,811 1,827 0.9% 5,169 5,271 2.0%
Net profit margin (%) 13.8% 11.4%   14.2% 12.3%  
No. of shares (m) 101.2 101.2   101.2 101.2  
Diluted earnings per share (Rs)* 71.6 72.2   68.1 69.5  
Price to earnings ratio (x)         14.7  
(* annualised)            

What is the company's business?
Bajaj Auto Limited (BAL), with a capacity of 2.5 m vehicles, had a 23% market share in the two-wheeler segment in FY04. The company's sales mix (in volume terms) consists of 15% geared scooters, 67% motorcycles and the rest 18% from step thrus, ungeared scooters and three-wheelers. Though BAL has traditionally been a key player in the geared scooter segment, aggressive pricing coupled with a slew of new launches has resulted in increasing market share in the motorcycle segment from 16% in FY00 to 23% in FY04. It has also entered into an agreement with Kawasaki for export of motorcycles for emerging markets.

What has driven performance in 3QFY05?
The 'Discover' boost: As is evident from the table below, motorcycle volumes grew at a stellar rate of 64% in 3QFY05 as against the industry growth of 29% in the same period. This was possible mainly on account of the launch of 'Discover', which is an upgraded version of the company's flagship model 'Pulsar'. Just to highlight the shift in volume sales, in the first few months of the fiscal year, Bajaj Auto was clocking average monthly motorcycle volumes of 97,000 units. Post the launch, average monthly sales in the last four months has increased to more than 141,000 units. Though the festive season has also helped matters, the market share gain indicates that the new product has provided the volume impetus. However, overall two-wheeler volume growth is lower in 3QFY05 owing to the decline in geared and ungeared scooter volumes. The company has been unable to arrest the decline in volumes in both these segments (competitors like Honda and TVS have posted growth in ungeared scooter volumes). We expect the company to clock around 30% growth in motorcycle sales for FY05.

Volume break-up…
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Motorcycles 269,995 441,355 63.5% 760,658 1,053,566 38.5%
Total 2-wheelers 333,314 477,482 43.3% 955,890 1,176,827 23.1%
Three wheelers 63,516 49,501 -22.1% 168,745 168,260 -0.3%

Margin decline over?:Operating profit margin in 3QFY05 has declined significantly. The company has attributed the same to a combination of factors like higher input costs, lower volume growth of the three-wheeler segment and initial marketing costs towards the launch of 'Discover' during the quarter. Despite higher raw material costs to sales ratio, lower employee costs provided some cushion to margins (owing to VRS). As per the company, there is scope for further reduction in employees in the future (especially at the geared scooter manufacturing plant). Our EBDITA margin estimate for FY05 is marginally higher than 9mFY05 numbers and we will stick to our view.

Over the last few quarters: Though margin decline is higher in 3QFY05, if one compares the trend in margins over the last three quarters, it is stabilising at 15% levels. While we have lowered margins in our estimate for FY05, we have increased the same in the future, as we expect some softening of input costs combined with lower staff and administrative overheads. Besides, the impact of the new launch is reflected in higher sales growth in 3QFY05 despite a fall in export volumes (export contribution to net sales has come down to 9% in 3QFY05 as compared to over 12% in 3QFY04).

Cost break-up…
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Raw materials 8,789 11,624 32.3% 24,040 29,681 23.5%
% sales 67.1% 72.4%   66.2% 69.3%  
Staff cost 591 610 3.2% 1,856 1,892 1.9%
% sales 4.5% 3.8%   5.1% 4.4%  
Other expenses 1,533 1,635 6.7% 4,934 4,745 -3.8%
% sales 11.7% 10.2%   13.6% 11.1%  

What to expect?
Bajaj Auto currently trades at Rs 1,022 implying a price to earnings multiple of 10.7 times our estimated FY06 earnings. As we mentioned earlier, there is upside in operating margins in the medium term (i.e. one to two years), as some input costs have softened already. As far as the sales growth prospects are concerned, we believe that for auto companies, it is very important to have a diversified market presence in order to de-risk from domestic economic performance. Bajaj Auto aims to increase export contribution in the next two to three years and in this context, our comfort level with the company is higher among two-wheeler manufacturers. Besides, given the strong cash balance, scope for further productivity improvement and upside on the margins front, Bajaj Auto remains our key play in the two-wheeler segment from a long-term perspective. We had recommended the stock in December 2004 and we maintain our view from a two to three year perspective.

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