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Bajaj Auto– which way is it headed ? - Views on News from Equitymaster
 
 
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  • Jul 29, 2000

    Bajaj Auto– which way is it headed ?

    The company's declining scooter market is not the only concern that shareholders of Bajaj Auto Ltd (BAL), the world's third and India’s largest two wheeler manufacturer may have. The other issue hovering around BAL these days is that whether the company is taking its core business seriously or not.

    The answer to this is both a yes and a no. The company has become very aggressive on the motorcycle segment with new product launches and expanding capacity. This stems from the fact that the motorcycle segment is hot currently and BAL does not want to loose its pie of this growing market to others. BAL’s market share was 24 percent in FY2000, and this is expected to go up in the current financial year. For the 1QFY01, its motorcycles volumes have gone up by 87 percent to 45,646 nos. The company has on hand a whole stream of new product launches in this segment over the next two years.

    BAL's total volumes up 9% YoY in the 1QFY01
    (no. of units sold) 1QFY00 1QFY01 % change
    Scooters 169,134 143,300 -15%
    Sunny/Spirit 11,004 19,562 78%
    Step Thrus 34,295 37,779 10%
    Japanese Motorcycles 45,646 85,274 87%
    Three-wheelers 37,158 39,439 6%
    Total 297,237 325,354 9%

    However a prime concern is the company’s risk taking nature. The company has been using a part of its surplus funds to trade on the stockmarkets. This is risky from an investor's point of view who may not be aware and will continue to evaluate BAL as a plain vanilla two wheeler manufacturer. In FY2000, the profit from trading of shares accounted for around 10.4 percent of the company's net profit, definitely not a small amount which can be overlooked. This may help in sprucing up a company’s returns in one year, but may make it actually decline in another. A common investor will however never know…...

    But why is BAL taking such risks? The answer is simple. It has surplus funds on hand. Of the company’s total balance sheet, cash, investments and loans and advances at Rs 38 billion account for 70 percent. On a positive note the company has announced plans for buyback of shares and plans to use a maximum of Rs 8.1 billion in the buyback.

    With the buyback of shares the company's surplus funds will go down. What could the company do with the remaining funds. They could increase dividend payouts and step up their spends on research and development. R & D expenditure accounted for a meagre 1.1 percent of total sales. It’s a paltry sum for a company of the size and nature of BAL. BAL has not focused seriously on research and development. Attempts to introduce technologically superior products with the assistance from international R&D boutiques does not help the company in developing its own R&D. If it wants it can turnaround its R & D and storm the market with the best available products. It has the expertise, the funds, distribution and marketing network as well as many years of experience in the growing Indian two wheeler market.

    BAL's operating margins decline in FY2000
    (Rs m) FY1999 FY2000 Change
    Sales 36,421 38,105 4.6%
    Other Income 2,651 4,051 52.8%
    Expenditure 30,114 32,409 7.6%
    Operating Profit (EBDIT) 6,307 5,696 -9.7%
    Operating Profit Margin (%) 17.3% 14.9%  
    Interest 46 41 -10.0%
    Depreciation 1,327 1,453 9.5%
    Profit before Tax 7,585 8,253 8.8%
    Other Adjustments 123 211 71.5%
    Tax 2,180 2,115 -3.0%
    Profit after Tax/(Loss) 5,528 6,349 14.8%
    Net profit margin (%) 15.2% 16.7%  
    Earnings per share* 46.31 53.18  
    (annualised)      

    The above stated concerns have played a role in the company’s deteriorating stock price performance. As a result of the above the main businesses of BAL have suffered too.

    In the declining scooter segment, the company’s market share has fallen from 62 percent in FY95 to 52 percent in FY2000. The reasons for this are mainly complacency and low quality products. The other players like LML have continued to capture a large chunk of the market. The company however is taking remedial action by introducing trendier four stroke scooter models.

    On the motorcycle front the company has been a late entrant in four stroke bikes. It took the company a few years to digest that motorcycles are preferred over scooters. However now the company is taking corrective measures on this front. It has lined up a slew of new launches in motorcycles in FY2001, the Pulsar and the 175CC Eliminator. The company's motorcycle sales grew by 87 percent in the 1QFY01 and have to some extent offset the decline in scooter sales. The overall volumes went up by 9 percent YoY in the 1QFY01.

    Besides scooters and motorcycles the company also has a presence in scooterettes (mopeds) and three wheelers. In scooterettes too the company lost market share due to the fact that they offered one single brand the “Sunny” to the market for nine long years. In FY2000 the company introduced the “Spirit” an attractive 60 cc model and has introduced a new version of Sunny, called “Sunny Spice”. These launches are expected to once again help BAL recover its market share.

    In the three wheeler market BAL continues to be the market leader with a 81 percent market share. Though this market has been fairly stagnant due to licensing problems from various state governments, it is bound to pick up as pollution norms are becoming stricter. To take advantage of this the company has recently launched its 4 stroked CNG model in New Delhi. Its strong hold in this segment is expected to continue.

    Though BAL's market share in mopeds and motorcycles will go up substantially, its operating margins could be under pressure due to increase in manufacturing costs and higher competition. This problem the company never faced in scooters as they are the lowest cost scooter manufacturer and enjoy the highest market share.

    On the whole BAL’s overall strategy will decide which way they go. Into unrelated ventures like finance and insurance, or stick to greener pastures like motorcycles and better quality scooters. It depends entirely on them. Concentration on the main line of business will definitely provide a higher comfort level to the shareholders of BAL.

     

     

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