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Bajaj Auto: Higher margins despite falling volumes - Views on News from Equitymaster

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  • May 16, 2014 - Bajaj Auto: Higher margins despite falling volumes

Bajaj Auto: Higher margins despite falling volumes

May 16, 2014

Bajaj Auto announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company's revenues grew by 4% YoY during the quarter, while net profit growth remained flat. Here is our analysis of the results.

Performance summary
  • Revenues grow by 4% YoY during the quarter even as volumes decline by 5% YoY.
  • Operating margins expand by 1.3% YoY to 18.9% during 4QFY14. This leads to an operating profit growth of 11% YoY for the quarter.
  • Net profit growth remains flat on account of substantial reduction in other income and higher tax expenses.
  • For the full year, while sales grow by a mere 1% YoY, net profit growth is better at 6.5% YoY.
  • The Board recommends a dividend of Rs 50 per share (dividend yield of 2.6%).

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Units sold 981,242 935,782 -4.6% 4,237,162 3,870,077 -8.7%
Net sales 47,465 49,323 3.9% 199,973 201,495 0.8%
Expenditure 39,092 40,009 2.3% 163,592 160,438 -1.9%
Operating profit (EBDITA) 8,373 9,314 11.2% 36,381 41,057 12.9%
EBDITA margin (%) 17.6% 18.9%   18.2% 20.4%  
Other income 2,436 1,848 -24.1% 7,955 7,064 -11.2%
Interest (net) 2 2   5 5 -9.3%
Depreciation 473 445 -6.0% 1,668 1,796 7.7%
Profit before tax 10,334 10,716 3.7% 42,662 46,321 8.6%
Exceptional items    
Tax 2,676 3,090 15.4% 12,227 13,901 13.7%
Profit after tax/(loss) 7,658 7,626 -0.4% 30,436 32,420 6.5%
Net profit margin (%) 16.1% 15.5%   15.2% 16.1%  
No. of shares (m)       289.4 289.4  
Diluted earnings per share (Rs)*         112.0  
Price to earnings ratio (x)*         17.2  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 4QFY14?
  • Bajaj Auto's (BJAT) sales volumes declined by 5% YoY during the quarter. While export volumes increased by 9% YoY, domestic volumes declined by a sharp 13% YoY. It may be noted that exports formed nearly 42% of total sales volumes. While total motorcycle volumes declined by 4% YoY during the quarter, total commercial vehicles sales (3-wheelers) declined by 9% YoY. For the full year, total motorcycle volumes declined by 9% YoY, while total commercial vehicles sales (3-wheelers) declined by 7% YoY. For the full year, domestic volumes fell by 15% YoY, while exports were up 2% YoY.

  • Despite a fall in volumes, BJAT reported a revenue growth of 4% YoY and this can be attributed to an increase in realisations, thereby indicating the significant change in product mix.

  • BJAT's operating profits grew 11% YoY on the back of a 1.3% YoY margin expansion during the quarter. The key reason for the same was lower costs of raw materials and purchases (as a percentage of sales). Margin expansion was also attributed to higher realisations from export markets.

    Cost break-upů
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw materials/ purchases 34,088 34,352 0.8% 144,066 138,767 -3.7%
    % sales 71.8% 69.6%   72.0% 68.9%  
    Staff cost 1,666 1,748 4.9% 6,395 7,266 13.6%
    % sales 3.5% 3.5%   3.2% 3.6%  
    Other expenditure 3,337 3,910 17.2% 13,132 14,405 9.7%
    % sales 7.0% 7.9%   6.6% 7.1%  
    Total expenditure 39,092 40,009 2.3% 163,592 160,438 -1.9%

  • However, at the profit before tax level, growth was restricted to 4% YoY largely attributed to lower other income. This coupled with higher tax expenses led to the flat growth in net profits for the quarter.

  • During FY14, the company's volumes decline by 9% YoY, while revenues came in higher by 1% YoY. Net profits rose by 6.5% YoY mainly due to expansion in operating margins.
What to expect?
At the current price of Rs 1,930, the stock trades at a multiple of 12.8 times our estimated FY16 earnings per share and at a multiple of 12.3 times our expected FY16 cash flow per share. The auto industry was considerably impacted during the year on account of the economic slowdown as a result of which most segments in the auto space saw volumes declining. Bajaj Auto was not spared either. Once economic growth picks up, its positive impact will be rubbed off on the auto industry as well. In the meantime, Bajaj Auto has lined up some launches under the Discovery family which are expected to bolster volumes going forward. As far as three wheelers are concerned, the company remains positive on the back of new product launches and release of new permits. Although the fundamentals of the company are good, our view is that the stock is fairly valued at the current price and hence investors should only consider buying it at lower levels.

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