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Bajaj Auto: Our key assumptions - Views on News from Equitymaster
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Bajaj Auto: Our key assumptions
Jul 1, 2005

Bajaj Auto, the second largest two-wheeler manufacturer, announced robust volume growth in FY05 and outperformed the industry. Despite this, the operating profit registered a growth of mere 5% YoY. The lower than expected growth in operating profits was on account of two reasons. Firstly, the rising input costs had an impact on margins. Secondly, increasing competition has taken a toll on the pricing power of the company, which directly affected the bottomline. While we had factored in a marginal increase in the realisations for FY05, actual realisation was lower by 2% YoY. Based on the performance of the industry and the company and also interactions with the management, we have made following assumption for next two years:

  • Realisations:  We have revised our realisation estimates for motorcycles downward by 4% in each year. This revision is after factoring in a marginal rise in realisations from the current levels of 1% per annum.

  • Segment wise break up:  We expect that the growth in the motorcycle segment will be largely led by market share gains in the entry and premium levels in the next three years. Bajaj is a relatively weaker player in the executive segment (with 10% share in FY05).

    In FY05, the company outperformed industry in ‘Entry’ segment comprehensively, aided by ‘CT 100’, thereby garnering 49% market share. For next two years, we believe that the company will consolidate its position. We have factored in some loss of ground in next two years, assuming no major new model launches.

    In Executive sub segment, the company will be able garner a larger share of pie with the launch of ‘Discover’ last year. In premium category, we expect the company to maintain its leadership due to strong brand equity.

  • Input cost:  While there are signs of softening of steel prices, we believe due to long-term procurement contracts, the company may not be able to reap the benefits fully this year. However, we have factored in some savings due to falling steel prices in 2HFY06. Apart from this, the company is also expected to benefit from savings in input cost on account of lower VAT incidence.

  • Employee cost:  The process of employee rationalization has borne fruits over the years, as employee cost as a percentage of sales have come down from 8% in FY01 to 4% in FY05. We feel that there exists further scope, especially when one considers that there are excesses with respect to the company’s geared scooter manufacturing facility in Pune.

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