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Bajaj Auto: Domestic market disappoints - Views on News from Equitymaster
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Bajaj Auto: Domestic market disappoints
Jan 30, 2008

Performance summary
  • The company has posted a 3% YoY drop in topline during the quarter on the back of a similar decline in overall volumes.

  • Tight control on costs has led to an operating margin improvement of 30 basis points during the quarter.

  • The bottomline has suffered a fall of 5% YoY after being affected by an extraordinary expense to the tune of Rs 511 m. Excluding the same, bottomline has grown at a modest rate of 6% YoY.

  • For the nine months, bottomline has suffered a fall of 10% YoY on the back of a 9% fall in topline.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Units sold 738,219 713,443 -3.4% 2,093,438 1,899,127 -9.3%
Net sales 25,682 25,017 -2.6% 72,069 69,731 -3.2%
Expenditure 22,046 21,383 -3.0% 61,174 60,148 -1.7%
Operating profit (EBDITA) 3,636 3,634 -0.1% 10,895 9,583 -12.0%
EBDITA margin (%) 14.2% 14.5%   15.1% 13.7%  
Other income 1,610 1,787 11.0% 3,979 4,286 7.7%
Interest (net) 2 19 777.3% 30 34 13.6%
Depreciation 472 493 4.5% 1,445 1,471 1.8%
Profit before tax 4,771 4,908 2.9% 13,400 12,365 -7.7%
Extraordinary income/(expense) (120) (515)   (362) (515)  
Tax 1,200 1,125 -6.3% 3,750 3,465 -7.6%
Profit after tax/(loss) 3,452 3,268 -5.3% 9,288 8,385 -9.7%
Net profit margin (%) 13.4% 13.1%   12.9% 12.0%  
No. of shares (m) 101.2 101.2   101.2 101.2  
Diluted earnings per share (Rs)*         118.4  
Price to earnings ratio (x)**         19.2  
(* on trailing twelve months earnings)

What has driven performance in 3QFY08?
The company’s sales in volume terms have fallen by 10% YoY in the domestic market while exports have jumped 32% YoY during the quarter. The fall in the domestic market has been led by motorcycles, where sales have come off by 10% YoY. Although this is a much-improved performance than the first half, where volumes had shrunk by 25%, the company has continued to lag the industry, where volumes were down by 7% YoY. It seems like the company’s new launches, especially the ‘XCD’ has failed to have the desired impact. Among other segments, the scooter segment has witnessed a huge spurt in sales albeit on a much lower base. Three wheeler sales also came down by 12% YoY during the quarter, due mainly to a subdued demand for the goods carriers. Led by a huge 57% jump in motorcycles sales, total exports have grown by 32% YoY and has helped dilute the impact of the fall in domestic market.

Sales break-up...
Domestic 3QFY07 3QFY08 % change 9mFY07 9mFY08 % change
Motorcycles 578,265 517,920 -10.4% 1,620,541 1,301,955 -19.7%
Scooter/scooterette 173 4,189 2321.4% 11,482 18,092 57.6%
3 Wheelers 44,162 38,765 -12.2% 135,686 118,489 -12.7%
Total 622,600 560,874 -9.9% 1,767,709 1,438,536 -18.6%
Exports            
Motorcycles 74,141 116,704 57.4% 223,114 358,227 60.6%
Scooter/scooterette - 211 n.a. 1,103 217 -80.3%
3 Wheelers 41,478 35,654 -14.0% 101,512 102,147 0.6%
Total 115,619 152,569 32.0% 325,729 460,591 41.4%
Grand total 738,219 713,443 -3.4% 2,093,438 1,899,127 -9.3%

Higher staff costs as well as other expenses, incurred mainly towards new launches have had a negative impact on margins. However, they have been more than offset by tight control on raw material costs thus leading to a small 30 basis point improvement in operating margins.

Cost break-up
(Rs m) 3QFY07 3QFY08 Change
Raw materials 18,856 17,892 -5.1%
% sales 73.4% 71.5%  
Staff cost 757 851 12.4%
% sales 2.9% 3.4%  
Other expenditure 2,433 2,638 8.4%
% sales 9.5% 10.5%  

Other income has jumped 11% YoY and has helped the profits at the PBT level to grow by a small 3% YoY. However, an extraordinary expense to the tune of Rs 511 m in the form of VRS compensation has resulted into the bottomline showing a small decline of 5% YoY during the quarter.

What to expect?
At the current price of Rs 2,270, the stock is trading at a multiple of 12 times our estimated FY10 cash flow. This is however not an appropriate way to value the stock, as we believe the current market price also seems to be factoring in the valuation of the company¡¦s insurance business. Including the same though, we believe that the company is adequately valued from a medium term perspective and unless it shows significant outperformance in volumes in the next few months, we would continue to stick with our view.

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