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Bajaj Auto: 2QFY01 margins expected to decline - Views on News from Equitymaster
 
 
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  • Oct 17, 2000

    Bajaj Auto: 2QFY01 margins expected to decline

    Bajaj Auto Ltd (BAL), India's largest manufacturer of two wheelers, will see a decline in its margins in the 2QFY01. The company's 2Q results are expected tomorrow (18th October). In the first half of the current financial year the company's motorcycles volumes grew by 104%, however its scooter volumes declined by 29%.

    This change in sales mix, with motorcycles assuming importance has put the company's margins under pressure. This is due to the fact that margins in the motorcycle and scooterette segment are lower than traditional scooters. This is expected to result in a decline in the company's operating margins in the 2QFY01.

    In the motorcycle segment the company has managed to garner up the second highest market share. It has a market share of 21.6%, overtaking TVS Suzuki's 18% for the 1HFY01.

    Volumes Sep-00 Sep-99 % change April-Sep 00 April-Sep 99 % change
    Scooters 28,436 57,587 -50.6% 243,935 342,145 -28.7%
    Sunny/Spirit 4,823 7,942 -39.3% 38,547 32,008 20.4%
    Step thrus 9,874 13,713 -28.0% 67,020 73,429 -8.7%
    Japanese Motorcycles 44,239 20,969 111.0% 202,334 99,241 103.9%
    Three-Wheelers 14,553 16,240 -10.4% 87,558 84,506 3.6%
    Total 101,925 116,451 -12.5% 639,394 631,329 1.3%

    BAL's operating margins declined from 14.8% in 1QFY00 to 10.6% in the 1QYF01, we do not expect any improvement in the 2QFY01.

    The company's future focus is going to be on motorcycles as well as four stroke scooters. However as the scooter industry is not showing any signs of a pick up, its difficult to see any improvement in BAL's scooter sales.

    On the costs side the company is trying to reduce its manpower costs. These accounted for 7% of total costs in FY2000. It has plans on offering a VRS to 2,000 employees to improve margins. However considering that this is not such a high component of total costs, the impact on margins will be marginal.

    To improve margins the company needs to use its surplus funds by investing in businesses where it can earn a return higher than its cost of capital. On the positive side the company has offered to buyback 18m shares at a price of Rs 400 per share, accounting for a total of Rs 7.2 bn. BAL's cash, investments and loans and advances stood at Rs 38 billion as of March 2000. Hence the company is still left with a huge surplus. These could be further used for increasing dividend payouts, and increasing spends on research and development.

    On the current price of Rs 321, BAL is trading at 6.2x on its FY2000 EPS of Rs 51.4.

     

     

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