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Bajaj Auto: Exports come to the party! - Views on News from Equitymaster
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Bajaj Auto: Exports come to the party!
Jul 17, 2006

Performance summary
Buoyed by a strong 95% YoY increase in exports, Bajaj Auto, India’s second largest manufacturer of two-wheelers has managed to grow its topline in 1QFY07 by 35% as compared to same quarter last year. Operating margins have also expanded by 60 basis points despite the current regime of high costs of input such as steel, aluminium and rubber. Higher tax provisioning has however restricted the YoY bottomline growth to 28%

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
No of units sold 504,972 649,496 28.6%
Net sales 16,342 22,027 34.8%
Expenditure 13,766 18,420 33.8%
Operating profit (EBDITA) 2,575 3,607 40.1%
EBDITA margin (%) 15.8% 16.4%  
Other income 928 946 1.9%
Interest (net) (1) (7) 711.1%
Depreciation 462 481 4.1%
Profit before tax 3,040 4,064 33.7%
Extraordinary income/(expense) (11) (104)  
Tax 950 1,300 36.8%
Profit after tax/(loss) 2,080 2,660 27.9%
Net profit margin (%) 12.7% 12.1%  
No. of shares (m) 101.2 101.2  
Diluted earnings per share (Rs)* 82.2 105.2  
Price to earnings ratio (x)**   22.0  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Bajaj Auto Limited, with a market share of 32% in FY06 (23% in FY04) is the second largest player in the two-wheeler industry. In FY06, the sales mix (in volume terms) consisted of 82% motorcycles, 12% three-wheelers and the rest 9% step-thrus, ungeared scooters and geared scooters. 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 a rise in market share in the motorcycle segment from 16% in FY00 to 32% in FY05. It has also entered into an agreement with Kawasaki for export of motorcycles to emerging markets

What has driven performance in 1QFY07?
Exports grow at a scorching pace: While the 27% YoY growth in domestic motorcycle volumes must not have surprised the industry watchers, what has really boosted the overall tally is the robust 130% growth in motorcycle exports as compared to same quarter last year. As a consequence, motorcycle exports now account for 12.5% of the company’s total motorcycles sales in comparison to a mere 7.3% during corresponding previous quarter. If the company’s recent initiatives on the export front are anything to go by, the numbers are likely to increase further from the current levels. Favorable product mix also seems to have helped the company register the 35% YoY growth in topline during 1QFY07.

Sales of scooters (geared and ungeared) have however been disappointing. The company has registered a YoY fall of 78% and 58% in the geared and ungeared category respectively. This has not impacted the overall volumes much as they form a small proportion of the overall two-wheeler volumes of the company. Three-wheeler sales have also been encouraging as they have grown by 33% YoY.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 11,424 15,544 36.1%
% sales 69.9% 70.6%  
Staff cost 732 856 16.9%
% sales 4.5% 3.9%  
Other expenses 1,610 2,020 25.5%
% sales 9.9% 9.2%  

Improvement in EBITDA margin despite high input price scenario: While rival Hero Honda has experienced pressure on the margin front, Bajaj Auto has been able to increase its operating margins by 60 basis points. Volumes in the company’s ‘ premium’ and ‘executive’ motorcycle segment have been growing at a fast clip and this helped it realise better margins. Strong growth in exports where mostly high-end motorcycles are exported has also played its part in improving the EBITDA margins of the company.

Higher tax outgo stunts bottomline growth: A higher tax provisioning has restricted the bottomline growth of the company to 28%. A marginal 2% increase in other income has also not helped matters.

What to expect?
At the current price of Rs 2,570, the stock is trading at a rich price to earnings multiple of 21 times our estimated FY08 earnings. Despite the robust growth in exports, we believe that the valuations have factored in the growth prospects of the company in the near to medium term. The spinning off of its investment business could however prove to be a growth trigger.

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