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Bajaj Auto: The big margin push! - Views on News from Equitymaster

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Bajaj Auto: The big margin push!
Jul 16, 2009

Performance summary
  • Topline remains muted due to a 12% YoY decline in volumes. However, on QoQ basis, the volumes are higher by 24%.
  • Operating margins improve by 7.9% on account of lower raw material costs (as a percent of sales).
  • Splendid operating show leads to a 68% YoY jump in bottomline.


Financial picture
Rs m 1QFY09 1QFY10 Change
Net sales 23,108 23,385 1.2%
Expenditure 20,440 18,831 -7.9%
Operating profit 2,668 4,554 70.7%
Operating margins (%) 11.5% 19.5%
Other Income 288 231 -19.6%
Interest (net) 9 60 548.9%
Depreciation 335 331 -1.3%
Profit before Tax 2,611 4,395 68.3%
Extraordinary item (240)
Tax 860 1,220 41.9%
Profit after Tax/(Loss) 1,751 2,935 67.6%
Net profit margin (%) 7.6% 12.6%
No. of Shares (m) 144.7 144.7
Diluted Earnings per share (Rs)* 53.4
Price to earnings ratio (x)* 21.6
*12 months trailing earning

What has driven performance in 1QFY10?
  • Bajaj Auto reported a muted topline growth of 1.2% YoY during 1QFY10. This is mainly on account of a 12% YoY decline in volume sales. While the domestic volume sales saw a drop of 12% YoY, the export volumes were down 10% YoY. The motorcycles, which are its mainstay, saw a fall of 15% YoY during the quarter in the domestic markets, while export volumes dipped by 10% YoY. Domestic three wheeler segment volume sales saw a 24% YoY growth in the domestic market during the quarter mainly on account of marketing initiatives. The market share in the domestic passenger segment improved from 47% to 49% during 1QFY10 led by a 31% YoY growth in sales.

    Sales break-up…
    Domestic 1QFY09 1QFY10 YoY Change 4QFY09 QoQ Change
    Motorcycles 388,328 330,194 -15.0% 249,670 32.3%
    Scooter/scooterette 2,772 1,537 -44.6% 1,319 16.5%
    3 Wheelers 30,278 37,636 24.3% 37,641 0.0%
    Total 421,378 369,367 -12.3% 288,630 28.0%
    Exports          
    Motorcycles 170,305 152,555 -10.4% 124,034 23.0%
    Scooter/scooterette 572 156 -72.7% 416 -62.5%
    3 Wheelers 27,840 25,584 -8.1% 27,189 -5.9%
    Total 198,717 178,295 -10.3% 151,639 17.6%
    Grand total 620,095 547,662 -11.7% 440,269 24.4%

  • However, as compared to 4QFY09, the volumes have seen an upswing on account of fiscal stimulus and launch of new products. The company launched Pulsar 150, Pulsar 180 and Pulsar 220 during 1QFY10. Pulsar’s volume sales touched 42,000 during June 2009 as compared to average 28,000 during the last full year. The overall volume sales are higher by 28% QoQ in the domestic region and 18% QoQ in exports.

  • On the costs front, a sharp 11% YoY decline in the raw material costs helped the operating margins improve by 7.9%. Raw material costs, the major cost head that accounts for nearly 66% of revenues, witnessed the maximum contraction, thanks mainly to drop in prices of key commodities like steel, aluminium and plastics. The expansion would have been more but for higher other expenses which jumped 17% YoY. The company has outperformed our expectations on the margin front by a fair distance. On the sequential basis, the operating margins have improved from 15.2% due to better product mix, larger volumes and favourable exchange rates in exports.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 17,454 15,470 -11.4%
    % sales 75.5% 66.2%
    Staff cost 1,081 1,129 4.4%
    % sales 4.7% 4.8%
    Other expenditure 1,904 2,231 17.2%
    % sales 8.2% 9.5%

  • Excluding the extraordinary items (foreign exchange gain/loss) during 1QFY10, the PBT grew by 68% YoY. Strong margin expansion coupled with lower depreciation and tax outgo led to 68% increase in bottomline. Had it not been for the extraordinary items, growth in net profit would have been even higher. The tax rate stood at 27.8% as compared to 32.9% during 1QFY10. To maximise the tax benefits available at Uttarakhand, the company is shifting some of its more profitable products to the Pantnagar plant, which led to lower tax rate.

What to expect?
At Rs 1,156, the stock is trading at a price to cash flow multiple of 15 times our FY12 estimates. Though on a year on year basis, the volume performance is lower, the company is witnessing better times as compared to the beginning of this year. While new launches and revival in exports would aid its growth, the valuations seem to be on the higher side.

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