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Bajaj Auto: No respite - Views on News from Equitymaster
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Bajaj Auto: No respite
Jul 12, 2007

Introduction to results
  • Led by 13% decline in motorcycles, overall volumes fall 12% YoY

  • Topline shrinks by 4% YoY during 1QFY08

  • 330 basis points contraction in operating margins, led by lower sales and continued pressure on input costs

  • Bottomline falls by 15% YoY

(Rs m) 1QFY07 1QFY08 Change
No of units sold 649,496 571,113 -12.1%
Net sales 22,027 21,091 -4.2%
Expenditure 18,420 18,338 -0.4%
Operating profit (EBDITA) 3,607 2,754 -23.7%
EBDITA margin (%) 16.4% 13.1%  
Other income 946 1,027 8.6%
Interest (net) (7) (1) -91.8%
Depreciation 481 490 1.9%
Profit before tax 4,064 3,290 -19.1%
Extraordinary income/(expense) (104) -  
Tax 1,300 1,025 -21.2%
Profit after tax/(loss) 2,660 2,265 -14.9%
Net profit margin (%) 12.1% 10.7%  
No. of shares (m) 101.2 101.2  
Diluted earnings per share (Rs)* 105.2 89.5  
Price to earnings ratio (x)**   18.1  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Bajaj Auto, with a capacity of 3.2 m vehicles, has a 28% market share in the two-wheeler segment (FY07 share). The company's sales mix (in terms of units sold) consists of motorcycles (87%), ungeared scooters (1%) and three-wheelers (12%). Though the company has traditionally been a key player in the geared scooter segment, aggressive pricing coupled with a slew of new launches has resulted in increasing market share in the motorcycle segment from 16% in FY00 to 28% in FY07. It has also entered into an agreement with Kawasaki for export of motorcycles for emerging markets.

What has driven performance in 1QFY08?
Motorcycles feel the heat: After growing at double-digit rates for the past few years, the domestic motorcycles industry is finally feeling the heat and Bajaj Auto, by virtue of being the second largest player in the industry has also been impacted by such a trend. Reluctance of finance companies to finance two-wheeler loans and rising interest rates have led to the company’s motorcycles sales falling by 13% YoY during the quarter. Infact, had it not been for the strong growth in exports, the decline would have looked even worse. The problems were further compounded when Bajaj Auto did not come out with a definite strategy vis-ŕ-vis its 100 cc bikes, resulting into falling sales for ‘Platina’, its offering in the same segment.

Going forward, the company expects the sales to pick up in the festive season, as it will also coincide with company’s own new launches in the motorcycles segment. ‘Kristal’ its latest offering in the scooter segment also failed to cut much ice and the volumes so far have been lukewarm. With the three-wheeler segment also failing to make any impact, as it recorded just 1% increase in YoY sales, volumes of the company fell 12% during the quarter as compared to 1QFY07.

1QFY07 1QFY08 Change
Motorcycles 568,187 493,565 -13.1%
Total 2 wheelers 578,621 499,777 -13.6%
Three wheelers 70,875 71,336 0.7%
Grand total 649,496 571,113 -12.1%
Exports out of above 97,723 149,804 53.3%

Cost pressures persist: With all the three major cost heads accounting for a larger percentage of sales as compared to same quarter last year, operating margins have fallen by a significant 330 basis points (3.3%). Not only are the input costs ruling at high levels, but the practice of providing additional features in products without a corresponding increase in prices is also taking its toll on the operating margins of the company. Add to this the cost associated with new product launches and we believe the industry might be headed towards a structural decline in margins. In other words, margins from a long-term perspective may not like the ones witnessed in the recent past.

(Rs m) 1QFY07 1QFY08 Change
Raw materials 15,544 15,260 -1.8%
% sales 70.6% 72.4%  
Staff cost 856 987 15.3%
% sales 3.9% 4.7%  
Other expenses 2,020 2,091 3.5%
% sales 9.2% 9.9%  

While the operating profits of Bajaj Auto have fallen by 24% YoY, decline in bottomline has come in at a slightly lower 15% YoY, due mainly to a benign depreciation outgo and a moderate 9% rise in other income. With the company’s Pantnagar plant operational, we believe that depreciation charges might witness a rise from the current levels.

What to expect?
At the current price of Rs 2,140 the stock is trading at a price to cash flow multiple of 11 times our estimated FY10 cash flow. This is quite close to our valuation band of 14 times (inclusive of its insurance ventures) and since we do not see any need to upgrade our numbers, we continue to stick with our ‘SELL’ view on the stock.

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