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Bajaj Auto: Analyst meet update

May 9, 2001

Bajaj Auto Limited (BAL) has reported a 57% YoY decline in net profit to Rs 2,626 m in FY01 (Rs 6,137 m in FY00). The company's sales declined by 3% YoY to Rs 36,900 m on the back of a 14.4% drop in volumes during the year. The main highlights of Bajaj Auto's analyst meet are:

Financial details

  • The company's operating margins in FY01 declined by 700 basis points to 7.9% as compared to 14.9% in FY00. The main reasons for this is a 41% decline in volumes in the geared scooter market (which enjoys the highest margins) as well as higher costs in relation to marketing. Besides the company's pricing policy of its Boxer model in the motorcycle segment at a lower range has resulted in very low margins in this segment in FY01.

  • In 4QFY01, the company's sales fell by a sharp 20% YoY as a result of a 31% drop in volumes during this period, due to a slowdown in the two wheeler segment. The fall in operating profits would have been higher during this period had it not been for cost cutting efforts in the motorcycle division as well as lower discounts offered on its products in this quarter as compared to the earlier quarters.

  • The company has incurred a one time expenditure on its voluntary retirement scheme. This cost the company Rs 800 m in FY01. 2,017 employees took the VRS during FY01. The company's total employee strength stands at 13,900 employees in FY01 as compared to 17,200 employees in FY00.

  • BAL's other income was lower in FY01, due to lower surplus funds available on hand due to its buyback in which the company spent Rs 7.3 bn. Besides the company's profit on sale of equity investments was lower at only Rs 250 m in FY01 as compared to Rs 1,430 m in FY00, due to unfavourable stock market conditions. The company's profitability in FY01 was affected by this lower other income. In FY00, other income accounted for 10% of total income as compared to only 6.6% in FY01.

    Other income break up (Rs m) FY00 FY01
    Dividends 380 340
    Interest- Debentures, Bonds, Govt. Securities 760 570
    Interest on ICDs & others 560 490
    Income from mutual funds 230 140
    Lease rent & lease equalisation 460 430
    Profit on sale of investments 1430 250
    Surplus on redemption on treasury bills 20 130
    Interest on fixed deposits - 50
    Others 210 240
    Total 4050 2640

  • The company's tax outgo during the year was lower due to tax incentives it received as a result of putting up its windmill plant for generating power and its VRS outgo. The company's effective tax rate reduced from 26% in FY00 to 7% in FY00.

    Volumes FY00 FY01 % change
    Geared scooters 739,916 435,667 -41.1%
    Ungeared scooters 69,335 75,594 9.0%
    Step thrus 176,194 120,589 -31.6%
    Japanese Motorcycles 255,176 421,997 65.4%
    Three-Wheelers 171,977 155,170 -9.8%
    Total 1,412,598 1,209,017 -14.4%

Future Prospects:

  • BAL is optimistic on the motorcycle segment and sees the market growing at 15-20% in FY01. It expects its motorcycle volumes to surge by 40-50% in FY01, as a result of competitive pricing as well as new product introduction. The company through its cost cutting efforts has managed to reduce its cost per motorcycle by Rs 4,000. BAL's motorcycles are now profitable, in FY01 the company managed to just about break even in this segment. Hence its margins are likely to go up, even if the company does not increase prices of its vehicles. Besides the company will be introducing higher margin motorcycles like Pulsar and Acer during the current year in the 150 cc to 180 cc range. This too will help in improving the company's margins.

  • BAL is hoping to sell 50,000 motorbikes per month from October 2001 onwards, as compared to an average of 35,000 bikes per month in FY01.

  • Competition is expected to be higher in the motorcycle segment in the current year, but Bajaj is confident of increasing its market share due to its aggressive pricing policy in the 100 cc segment. In FY01, BAL's market share was 21%. It plans to launch its higher end bikes in the larger cities like Mumbai and other metros to increase its volumes and margins.

  • Bajaj Auto accounts for 40% of Kawasaki's worldwide sales. Though the company has tied up with Kawasaki for majority of its motorbikes, it does not plan to depend only on Kawasaki. It is making some bikes indigenously on its own. The 'Pulsar' to be launched in August 2001, is one such model.

  • In the geared scooter market the company has launched a stripped down version of its 'Chetak' model. They expect the scooter market to grow in the current year as they see demand in the states of UP, Punjab and Haryana picking up. In April 2001, BAL saw an improvement in the eastern states. This being mainly because many consumers still prefer scooters as an entry level vehicle.

  • BAL is not very positive on Step thrus segment and ungeared scooter segment and sees volumes in these segments decline in the current year.

  • In terms of margins, the company’s margins are lower in the ungeared scooter segment as compared to its competitors, Kinetic Honda and TVS Scooty. In geared scooters, BAL has the highest margins and is hence the most profitable player. In motorcycles now margins have improved and are likely to be better in the current year due to cost cutting. In three wheelers too margins are very high and it is a very profitable segment.

Capex plans

  • In the company's windfarm operations, it has planned a total capacity of 59.2 MW at a cost of Rs 2.7 bn. Of this 39.2 MW has already been installed and the balance proposed 20 MW, costing Rs 970 m will be installed in the fourth phase which is in progress at Kovadaya Dongar in Ahmednagar district. After the completion of this 80% of the company's power requirements will be met through its own plants. This will result in some savings in terms of power costs to BAL (power costs accounted for 3% of total costs in FY00).

  • The company has tied up with Allianz AG for non life and life insurance business. The total capital for non life is slated to Rs 1.1 bn and Rs 1.5 bn for the life business. Of these two joint ventures, Bajaj will hold a 76% stake and Allianz the balance 24%. They have received R3 permission from IRDA for the non-life joint venture.

BAL has been keen to export its three wheelers to China in the form of completely knocked down kits, as demand is promising for this segment in China. Hence, it is on the lookout for a partner in the Chinese market for the same. In return it plans to sell ungeared scooters for its Chinese counterpart as it is not very strong in this segment domestically.

On the current price of Rs 232, BAL is trading at 6.6x FY02E EPS of Rs 35.1.

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