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Bajaj Auto: Strong start to the year - Views on News from Equitymaster
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Bajaj Auto: Strong start to the year
Jul 29, 2015

Bajaj Auto announced the first quarter results of financial year 2015-2016 (1QFY16). The company's revenues grew by 7% YoY during the quarter, while net profits were up by 37% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 7% YoY during the quarter as volumes rise by 2.5% YoY.
  • Operating margins improve by 2.7% YoY to 20.3% during 1QFY16. Thus, operating profits grow by 23% YoY for the quarter.
  • Led by the strong growth in operating profits and higher other income, net profits grow by 37% YoY.

Financial performance: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Units sold 988,430 1,013,029 2.5%
Net sales 52,524 56,135 6.9%
Expenditure 43,273 44,738 3.4%
Operating profit (EBDITA) 9,251 11,397 23.2%
EBDITA margin (%) 17.6% 20.3%  
Other income 2,193 4,368 99.2%
Interest (net) 1 1 -27.3%
Depreciation 692 784 13.3%
Profit before tax 10,751 14,980 39.3%
Tax 3,351 4,832 44.2%
Profit after tax/(loss) 7,400 10,148 37.1%
Net profit margin (%) 14.1% 18.1%  
No. of shares (m) 289.4 289.4  
Diluted earnings per share (Rs)*   118.5  
Price to earnings ratio (x)*   20.9  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 1QFY16?
  • Bajaj Auto's (BJAT) sales grew by 7% YoY during the quarter led by higher realizations as volumes were up 2.5% YoY. Realizations were higher on account of a favorable product mix. While volumes of motorcycles were flat during the quarter (accounting for 86% of total volumes), three wheelers did better to grow by an impressive 21% YoY. As far as motorcycles are concerned, growth was largely led by the M1 mileage segment which comprises CT100 and Platina. Export growth was in double digits during the quarter led by growth in both volumes and realizations.

  • BJAT's operating profits grew by 23% YoY as margins improved by 2.7% to 20.3% during the quarter. The key reason for the same was lower raw material costs (as a percentage of sales). In the coming months, the company expects margins to remain strong on the back of higher export realizations and lower commodity prices leading to lower raw material costs.

  • Led by the strong growth in operating profits and higher other income, net profits grew by 37% YoY. Higher other income was attributed to the receipt of dividend from KTM and redemption of FMPs.
What to expect?

At the current price of Rs 2,480, the stock trades at a multiple of 12.6 times our estimated FY18 cash flow per share. Although Bajaj Auto has no presence in the scooters segment, we believe there are various growth triggers for the company over the next couple of years. These include a slew of launches under its highly profitable brand Pulsar, ramp up in the volumes of Discover, healthy growth in three wheelers and growth in exports. We have now incorporated our estimates for FY18 and the target price (including the investment in KTM) comes to Rs 2,884. This implies a compounded annual return of around 6%. Hence, our view is that investors Hold on to the stock of Bajaj Auto.

Also, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation. We suggest that no single large cap stock should comprise more than 5-6% of your total stock portfolio.

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