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Bajaj Auto: Hindered by falling volumes - Views on News from Equitymaster
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Bajaj Auto: Hindered by falling volumes
May 22, 2015

Bajaj Auto announced the fourth quarter results of financial year 2014-2015 (4QFY15). The company's revenues fell by 4% YoY during the quarter, while net profits declined by 18.5% YoY. Here is our analysis of the results.

Performance summary
  • Revenues fall by 4% YoY during the quarter as volumes fall by 16% YoY.
  • Operating margins fall by 1.2% YoY to 17.7% during 4QFY15. Thus, operating profits decline by 10% YoY for the quarter.
  • Net profits fall by 18.5% YoY on account of reduction in other income and higher depreciation charges.

Financial performance: A snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Units sold 935,782 782,669 -16.4% 3,870,077 3,811,201 -1.5%
Net sales 49,323 47,393 -3.9% 201,495 216,120 7.3%
Expenditure 40,009 39,015 -2.5% 160,438 174,955 9.0%
Operating profit (EBDITA) 9,314 8,378 -10.0% 41,057 41,166 0.3%
EBDITA margin (%) 18.9% 17.7%   20.4% 19.0%  
Other income 1,848 1,543 -16.5% 7,064 5,824 -17.6%
Interest (net) 2 63 3582.4% 5 65 1224.5%
Depreciation 445 638 43.5% 1,796 2,674 48.9%
Profit before tax 10,716 9,220 -14.0% 46,321 44,251 -4.5%
Exceptional item - -   - (3,403)  
Tax 3,090 3,004 -2.8% 13,901 12,711 -8.6%
Profit after tax/(loss) 7,626 6,216 -18.5% 32,420 28,137 -13.2%
Net profit margin (%) 15.5% 13.1%   16.1% 13.0%  
No. of shares (m) 289.4 289.4   289.4 289.4  
Diluted earnings per share (Rs)*         109.0  
Price to earnings ratio (x)*         20.9  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in FY15?
  • Bajaj Auto's (BJAT) sales grew by 7% YoY during the year led by higher realizations as volumes were down 1.5% YoY. Realizations were higher on account of a favorable product mix. While volumes of motorcycles fell by 4% YoY (accounting for 86% of total volumes), three wheelers did better to grow by 8% YoY. As far as motorcycles are concerned, the Pulsar brand grew by 5% YoY in the domestic market, while in the international markets, growth stood at 11% YoY. While Discover did very well in the international markets to grow by 37% YoY, performance in the domestic market remained subdued. Platina recorded a decent 12% YoY growth in the domestic market. As far as three wheelers are concerned, growth was largely led by the domestic market as volumes were up 25% YoY.

  • In the fourth quarter, the company faced some headwinds in various international markets on account of devaluation of local currency and state elections in Nigeria, availability of US dollars for imports and other uncertainties. However, according to the company, exports are expected to get back on track as normalcy returns in these markets.

  • BJAT's operating profits remained flat as margins contracted by 1.4% to 19% during the year. The key reason for the same was higher staff costs and other expenditure (as a percentage of sales). Raw material costs remained under control.

  • Net profits fell by 13% YoY on account of a reduction in other income and higher depreciation charges.
What to expect?
At the current price of Rs 2,275, the stock trades at a multiple of 12.7 times our estimated FY17 cash flow per share. Although Bajaj Auto has no presence in the scooters segment, we believe there are various growth triggers for the company over the next couple of years. These include a slew of launches under its highly profitable brand Pulsar, ramp up in the volumes of Discover and growth in exports. We had given a Buy on the company in March 2015 with a target price of Rs 2,629 from an FY17 perspective. This is on the sum of parts (SOTP) basis and includes the value of its investment in KTM. Since then, the stock is up by around 13%. Thus, given that the margin of safety has reduced, we have now changed our view on the stock from 'Buy' to 'Hold'.

Also, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation. We suggest that no single large cap stock should comprise more than 5-6% of your total stock portfolio.

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