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Bajaj Auto: Making inroads - Views on News from Equitymaster
 
 
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  • Aug 14, 2003

    Bajaj Auto: Making inroads

    Despite concerns of growing competition in the Indian two-wheeler market, stocks like Hero Honda, Bajaj Auto and TVS has been on the rise in the recent past. Among the top three, Bajaj Auto stands out, as the company has increased its market share in the motorcycle segment from the bottom of the chart to the second largest over the last four years. We take a look at the company's first quarter performance and future growth prospects.

    (Rs m) 1QFY03 1QFY04 Change
    Net sales 10,682 10,822 1.3%
    Other Income 346 1,017 194.3%
    Expenditure 8,715 9,262 6.3%
    Operating Profit (EBDIT) 1,966 1,560 -20.7%
    Operating Profit Margin (%) 18.4% 14.4%  
    Interest 3 2 -39.4%
    Depreciation 431 434 0.7%
    Profit before Tax 1,878 2,141 14.0%
    Extraordinary items - (17) -
    Tax 660 530 -19.7%
    Profit after Tax/(Loss) 1,218 1,594 30.9%
    Net profit margin (%) 11.4% 14.7%  
    No. of Shares (m) 101.2 101.2  
    Diluted Earnings per share (Rs)* 48.1 63.0  
    P/E Ratio (x)   10.5  
    (* annualised)      

    For the first quarter ended June 2003, net sales has increased only marginally by 1%. One of the reasons that could attributed to the slower growth in revenues is the transporter strike. Volumes sold in 1QFY04 on a month-on-month basis reflect the effect of the strike from the table below. Total unit sales in April and May 2003 was lower by 17% and 6% YoY respectively, with motorcycle sales also growing at a much slower rate. However, post the effect of the strike, June 2003 has seen a sharp upward correction in units sold. We expect the trend to continue for the rest of FY04. Having said that, geared scooter volumes continue to show a downward trend.

    Operating margins have declined significantly by 400 basis points in 1QFY04. Two key factors have led to this decline in operating margins. Firstly, raw material costs as a percentage of sales has increased from 62.8% in 1QFY03 to 63.3% in 1QFY04. Secondly, the company has charged Rs 440 m as provision towards impairment of investments. If one were to remove this Rs 440 m additional charge from operating expenses, operating margin has actually increased by 10 basis points in 1QFY04.

    Segment wise performance
    (Nos) Apr-03 May-03 Jun-03 1QFY04
    Motorcycles 71,074 87,217 82,239 240,530
    % YoY change 5.9% 8.6% 19.2% 11.2%
    Scooters-Geared 13,160 16,737 12,699 42,596
    % YoY change -54.3% -46.8% -49.5% -50.1%
    Scooters-Ungeared 2,099 4,052 5,242 11,393
    % YoY change -57.2% 5.4% 19.6% -13.3%
    Step thrus 2,291 2,994 2,726 8,011
    % YoY change -53.1% -39.1% -32.4% -42.1%
    Three wheelers 10,681 16,430 17,891 45,002
    % YoY change -24.5% 14.7% 18.3% 3.2%
    Total 99,305 127,430 120,797 347,532
    % YoY change -17.2% -5.5% 2.7% -6.7%
    (Source: Company website)

    As far as the prospects for FY04 are concerned, we expect the company's motorcycle division to post a 25% growth in volumes. In order to increase its presence in the executive segment where the company has an estimated 9% market share, it has launched a new model recently. One more model, which the Kawasaki world bike, is also slated for launch during the course of the year. Both these factors could boost motorcycle sales significantly in 2004. However, we have exercised caution on the geared and ungeared scooters front. While the former segment is shrinking in total volumes, in the latter, Bajaj Auto does not have competitive models at the current juncture. But we expect a stable growth in three-wheeler sales over the next five years from the company.

    The stock currently trades at Rs 664 implying a P/E multiple of 10.5x annualised 1QFY04 earnings. Though we expect volume growth at a higher level when compared to the market leader, Hero Honda, operating margins will come under pressure. The motorcycle market is increasingly becoming fragmented with more players expected in the near future. Already, discounting is the norm and consequently, we expect both price realisations and margins to remain under pressure in FY04.

     

     

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