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Bajaj Auto: Investor meet extracts
Sep 8, 2005

At the second Equitymaster Investor Meet held on August 27, 2005 at Pune, Mr. Kevin Dísa, CFO, Bajaj Auto shared his insights on the Indian two and three-wheeler industry in general and Bajaj Auto in particular, its future and how well the company is positioned to exploit the emerging trends. Here are the key extracts from his presentation.

Look at the consolidated picture
Mr. Dísa indicated that when one talks of Bajaj Auto today, one of the basic mistakes that are made is to largely focus on Bajaj Auto in isolation and without looking at the consolidated picture. In case of Bajaj Auto, the group has three companies in its fold. One is the automobile company, Bajaj Auto. Then there is the finance company (Bajaj Capital), which is one of the biggest and the fastest growing companies in the consumer sector, barring of course the NBFCs. And then it has the two insurance companies under Bajaj Allianz.

While Bajaj Autoís turnover has grown by 21% YoY in FY05, general insurance has grown by nearly 80% YoY. Also, revenues from the life insurance business have grown by over 350% during the fiscal. This is something that one needs to keep in mind when talking of Bajaj Auto because the company has 74% stake in the insurance ventures and 47% stake in the retail finance.

Investors should note that while in FY04 the auto business contributed to 87% of the business, the same came down to 77% in FY05. Again, when one considers the profits, for the insurance businesses, these have grown from Rs 40 m in FY04 to Rs 400 m in FY05. It is important to note that in general insurance is a long gestation business and to that extent, one has to be realistic. For Bajaj Auto, the general insurance business has already started making profits and the life insurance business is expected to show profits much before the general norm of 8 years.

The automobile business
As per Mr. Dísa, the Indian 2-wheeler industry has seen a robust growth in the past and is expected to repeat its performance in the future as well. The industry gives very good return on operating capital, has extremely high EBIDTA margins and more importantly, it is a consolidated market with all the Japanese players by and large already being present in India. The company does not see any further threat whether from Chinese or other foreign companies.

He also indicated that investors should not look at monthly or quarterly numbers because, the 2-wheeler industry follows a cyclical pattern. You will normally see April-May-June showing a rise, followed by decline in the next quarter and again a surge in the next three months, i.e. October to December. But on a YoY basis, you will se that the growth pattern has always shown a higher growth of about 12%-15%. You do get a few years where you do see a slight decline due to drought or floods or some other reasons, but growth catches up in the next years.

If one sees, historically, the 2-wheeler industry has shown a consistent growth of 14% per annum. In FY05, the industry grew by 17% YoY and this year, the management is expecting the industry to grow by about 11%. With the company transforming into a leading motorcycle player, it is participating in the growth of the industry. The management estimates that in the next 5-7 years, the CAGR of the motorcycle industry will be around 10%. This year, the company is looking at a growth of 15% over FY04. For the first 4 months of the fiscal, the motorcycle growth has reportedly been around 20%.

The management is confident of the growth of about 12%-15% per annum because of the statistics that show that in India, the penetration level of 2-wheelers is marginally below 40 per 1000 population. Now, if this were to benchmark with other countries and with the GDP per capita, we see that India is well below Indonesia that has a penetration of about 60 per 1000 population, Thailand which is at about 210 and Malaysia that has around 215.

But, why not cars?
People do ask a question that wonít people go to cars. The answer, as per the management is Ė yes. As aspirations rise, everybody wants to move to cars. But because of costs and per capita income being low, on a purchasing power basis, the mass shift from motorcycles to cars, the management believes, will take place when the per capita income will rise to a level of US$ 10,000 per annum.

Future growth drivers
Demographics: This is working in advantage for the motorcycle manufacturers. The average age of a person who buys a motorcycle is in the range of about 18-40. This batch is likely to go up from 605 m currently to 744 m by 2009.

Replacement cycle: The other thing that is driving demand is the replacement cycle. Traditionally, people used a vehicle for a much longer time. Today, with the excitement of different types of motorcycles coming out, people want to change vehicles and therefore the earlier replacement period of motorcycles of about 7 years has come down to as low as 3 years.

Spread of financing: People are not anymore averse to loans. And therefore, today in the country, around 60% of the motorcycle financed in the urban territories is through ICICI Bank, HDFC Bank and Bajaj Auto Finance.

The management is of the belief that these factors shall result in an estimated market growth to 10 m vehicles by 2009-10 against the current sale of about 6 m vehicles.

Bajaj beats motorcycle industry growth
Bajaj Auto has beaten industry growth not by price but by product launches. In June 2004, the company had launched he CT100, then Discover was launched in September and the upgraded version of Pulsar was launched in December 2004. All this has resulted in Bajaj moving from a price warrior to a price leader.

On 3-wheelers
Apart from scooters and motorcycles, Bajaj Auto also has a presence in the 3-wheeler industry, which is around 20% of its overall revenues. The 3-wheeler industry is very difficult to project any growth. In FY04, it grew by 7%, and the company anticipates a growth of about 7% in the current fiscal. Around 25% of the companyís 3-wheeler sales are from exports.

On cash flows
Bajaj Auto works on negative working capital and as a result, cash generated every year is in excess of Rs 9 bn. This free cash flow that has been invested is as part of the company policy kept for the future. Most of the money is kept in fixed income securities. Currently, around 80% of the money is placed in fixed income securities. Investments in the companyís books are today at Rs 50 bn but on a mark to market basis these are about Rs 58 bn.

What to expect?
The stock currently trades at Rs 1,468, implying a price to earnings multiple of 12.9 times our estimated FY08 earnings. We believe that there is upside to our estimates owing to our conservative stand on the scooters side and consolidated profitability growing faster. We believe that Bajaj Auto is one of the preferred plays in the two-wheeler sector from a two to three year time frame.

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