May 14, 2003|
Bajaj Auto: Growth under pressure
Bajaj Auto, one of the largest motocycle manufacturers in the country, reported robust FY03 results. The company has reported a topline growth of 16% while its net profit has risen by 3%. However one must take into consideration the fact that the compnay had an extraordinary income in FY02, thus profit growth in FY03 is skewed. While not accounting for the extraordinary gain in FY02, net profit growth in FY03 has been a robust 33%. The company has also managed to improve its operating margins in FY03 by 200 basis points, which has further helped in the improvement of its bottomline.
The company's topline growth in FY03 has been mainly brought about by the robust growth in motorcycle sales, which grew by a healthy 32%. However we must also point out that motorcycle sales are witnessing a slowdown and the growth in volumes has been slowing down progressively. To put things in perspective, motorcycle volumes grew only by 13% in 4QFY03 as against 21% and 29% in 3QFY03 and 2QFY03, respectively. The company continues to extend its market share in the motorcycle segment despite the slower growth in volumes. According to SIAM (Society of Indian Automobile Manufacturers) Bajaj Auto's market share in the motorcycle segment has risen from 21.7% to 23.0% in the April-December 2002 period. Due to high volume growth in motorcycle and three wheelers, the overall sales volumes of the company have grown by 6% in FY03.
|Operating Profit (EBDIT)
|Operating Profit Margin (%)
|Profit before Tax
|Profit after Tax/(Loss)
|Net profit margin (%)
|No. of Shares (m)
|Earnings per share (Rs)*
Operating margins have increased during FY03 despite aggressive price reductions and discounts in the market. The company has been focusing on reducing raw material expenses by lowering imports and increasing productivity in the last three years, which have yielded positive results. That said, due to late entry in the motorcycle category, average realisation has been under pressure in the last three years and we expect this to dip even further in FY03, as well as in the future. The two-wheeler market, notably motorcycles, is offering a discount in the range of Rs 3,000-Rs 3,500 per vehicle.
|| Change (%)
|| FY02 - % sales
|| FY03 - % sales
The stock currently trades at Rs 476 implying a P/E multiple of 10x its FY03 earnings. While the company's performance at the topline level is commendable, going forward the motorcycle segment is likely to witness a slowdown in demand. Already this slowdown has resulted in acute pressure on prices. Going forward we do not expect motorcycle sales to sustain at the levels seen in FY03. This means that pricing pressure is likely to continue in the short term and consequently it will put pressure on margins. The company hopes to keep volume growth ticking by moves such as introducing a new 125 cc motorcycle model. However, new models are slowly turning out to be unprofitable considering the development and marketing costs involved. In the scooter and segment also the company has been witnessing pressure. Since competition has significantly increased in this segment, we expect this pressure to continue and lead to a fall in volumes going forward.
The company's three wheeler division has however shown promise as indicated by a 21% growth it recorded in FY03. Also the company seems to be tasting success in its export-ventures. The company's export volumes, including two wheelers and three wheelers, have risen by 113% (on a lower base). In FY04 too the company is targeting a total volume growth of 40%. While it is too early to comment on the targets set by the compnay, one thing is certain - the company's fortunes are likely to be closely linked to export volumes as and when it assumes a large part of total volumes.
The consolidated picture of the company is also a cause of concern. Bajaj ventured into both life and non-life insurance in partnership with Allianz. Since insurance is generally a long-term business with pay back period starting from the fifth year of commencing operations, we expect consolidated profitability to remain subdued for the next four years. Given this backdrop, the stock is likely to remain volatile in the immediate term, which has been the case in the last few months. However any surprises on the exports front could be a trigger for the stock.
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