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Bajaj Auto: Riding on its bikes

May 18, 2001

Bajaj Auto Ltd (BAL), India's largest manufacturer of two and three wheelers has stolen the limelight on the bourses in the last couple of trading sessions. Despite dismal volume growth in its geared scooter division and three wheelers for the month of April 2001, the company has generated buying interest. The silver lining has come from its motorcycle division which reported a 49% YoY growth for the month of April 2001. This seems to be in line with what the company had indicated in its analyst meet. The company expects to clock in a growth of around 42% in FY02 to 600,000 bikes for this division as against an industry growth of around 15%-20%.

The reasons for this seems plausible. 80% of the total motorcycle demand comes from the four stroke 100 cc segment. BAL has managed to capture a 21% share in FY01 of the overall motorcycle market. Its largest selling brand 'Boxer' has done very well in the 100 cc segment due to its aggressive pricing policy. Though this affected the company's margins in FY01, its volumes were buoyant here.

In the current year too, the company expects this brand to do well as compared to other domestic brands. Also in comparison to the 100 cc-125 cc Chinese motorcycles, 'Boxer' is priced at a marginal premium. Hence a consumer may not opt for the cheaper Chinese bike due to the advantage of a large distribution network offered by BAL. The company has also managed to reduce its costs per motorcycle by Rs 4,000 in 4QFY01, and hence expects its margins to be better in FY02.

BAL plans to concentrate on this segment by launching its bikes Acer and Pulsar during the current financial year. Also the company plans to be aggressive in launching its products in the larger cities to gain higher market presence. BAL continues to eat into the market share of TVS Suzuki and Escorts Yamaha in this segment.

In FY02, the company's margins are likely to be driven by its overall cost cutting initiatives as well as higher margins and volumes in its motorcycle division. Though the company's margins in its geared scooter and three wheelers too are good and higher than the industry average, volumes continue to slacken in these segments.

The company is making efforts to revive demand in the geared scooter segment by launching stripped down versions so as to capture the entry level consumer. Though the company claims to have seen improvement in some of the northern and eastern markets for its geared scooters in April 2001, overall volume growth is still lacking.

A negative that continues to haunt Bajaj Auto is its surplus fund usage. Despite its buyback and investments in its insurance joint venture, the company is still sitting on a huge surplus of funds. In FY01 the company’s profit from sale of investments fell to Rs 250 m as compared to Rs 1,430 m in FY00, due to the unfavourable stock markets.

As of March 2001, the company has 40% of its investments in equity and 60% in debt. The company's equity investments in FY01 remain at more or less the same levels as they were in FY00.

The company's investments in its insurance venture too will not generate returns for another four to five years atleast, and hence will be a drag on the overall returns of the company.

On the current price of Rs 227, BAL is trading at 6.5x FY02E EPS of Rs 35.1. We expect a net profit of Rs 3,548 m for FY02E, a growth of 35% YoY.

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