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Bajaj Auto: Taxes trim profits

Aug 2, 2004

Performance summary
Bajaj Auto, one of India's leading two-wheeler manufacturers, has registered a respectable 14% YoY growth in topline during 1QFY05.Although the operating margins have improved, higher tax provisioning has restricted the bottomline growth to a mere 2% YoY.

What is the company's business?
Bajaj Auto is the second largest two-wheeler manufacturer in the country. The company had a total capacity of 2.5 m vehicles in FY04. The sales mix (in volume terms) consisted of 15% geared scooters, 67% motorcycles and the rest 18% from step thrus, ungeared scooters and three-wheelers. Though BAL 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 23% in FY04. It had entered into an agreement with Kawasaki for export of motorcycles for emerging markets.

(Rs m) 1QFY04 1QFY05 Change
Net sales 10,741 12,261 14.2%
Other income 1,098 1,064 -3.1%
Expenditure 9,263 10,417 12.5%
Operating profit (EBDITA) 1,478 1,844 24.8%
Operating profit margin (%) 13.8% 15.0%  
Interest 2 2 -15.0%
Depreciation 434 462 6.5%
Profit before tax 2,141 2,446 14.2%
Extraordinary items (17) (15) -
Tax 530 800 50.9%
Profit after tax/(loss) 1,593 1,631 2.4%
Net profit margin (%) 14.8% 13.3%  
No. of shares (m) 101.2 101.2  
Diluted earnings per share (Rs)* 63.0 64.5  
P/E (x)   13.3  
(* annualised)      

What has driven performance in 1QFY05?
Motorcycle sales are the highlight:  The company has continued to witness fall in scooter sales (down 31% YoY). Better substitutes to geared scooters and lack of competitive models in the ungeared scooters segment has resulted in the company steadily losing market share. Motorcycles sales however, were higher by 15% YoY, higher than the industry growth rate of 12%. The improvement in market share could be attributed to launch of ‘Bajaj CT 100', which accounted for nearly 23% of all motorcycles sold by the company during the quarter and further enabled it to regain leadership in the entry level segment with a 42% market share in June 2004. Sales of 3-wheelers were also higher by 20% YoY. The company continues to be a dominant player in the passenger carrier segment with an 89% market share. Market share in the goods segment also improved to 26%. The company also continued to be the number one exporter of 2&3 wheelers in the country and witnessed a strong 47% jump in exports. Overall, the company managed to sell 7% more vehicles as compared to same quarter last year.

Segmental break-up
Segment 1QFY04 1QFY05 %change
Motorcycles 240530 275790 14.7%
Scooters-Geared 42596 29610 -30.5%
Scooters-Ungeared 11393 7816 -31.4%
Step thrus 8011 5619 -29.9%
Total 2 wheelers 302530 318835 5.4%
Three-wheelers 45002 54080 20.2%
Grand total 347532 372915 7.3%

Operating margin:  Despite higher raw material costs, operating margins have improved by 120 basis points. This could largely be attributed to improved product mix and a significant 13% decline in other expenses of the company. Going forward, we expect the wage bill to come down as the company had announced a VRS (Voluntary Retirement Scheme) at one of its plants, which has been accepted by nearly 700 workers.

Cost break-up...
(Rs m) 1QFY04 1QFY05 Change
Raw materials 6,895 8,217 19.2%
% sales 64.2% 67.0%  
Staff cost 624 690 10.5%
% sales 5.8% 5.6%  
Other expenses 1,743 1,510 -13.4%
% sales 16.2% 12.3%  

Net profits:  While the profits at the PBT levels have been in line with the topline growth, a 51% rise in tax incidence has restricted the overall bottomline growth to 2%. The company had received some tax-free income during the same quarter last year and this has made the current year's taxes look higher.

What to expect?
The stock is currently trading at Rs 856, implying a P/E of 13x annualised 1QFY05 earnings. While the valuations look attractive from a long-term perspective, increasing competition in the motorcycles segment and company's falling volumes in scooters segment does increase the risk profile of the stock. Besides, the company's policy of making large-scale investments (unrelated to operations) does raise some doubt about the shareholder friendliness of the company.

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