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Bajaj Auto: ‘XCD’ing expectations - Views on News from Equitymaster

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Bajaj Auto: ‘XCD’ing expectations
Oct 19, 2007

Performance summary
  • Exhibiting better product-mix, the company has posted a 3% YoY drop in topline during the quarter on the back of a 13% decline in overall volumes.

  • Tight control on costs has led to an operating margin improvement of 70 basis points during the quarter.

  • Higher other income and lower interest and depreciation charges has further boosted the bottomline during the quarter, helping it grow by 6% YoY.

  • On the half yearly front, bottomline has suffered a fall of 4% YoY on the back of a similar fall in topline.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Units sold 708,125 614,093 -13.3% 1,355,219 1,185,684 -12.5%
Net sales 24,360 23,623 -3.0% 46,386 44,714 -3.6%
Expenditure 20,708 19,915 -3.8% 39,128 38,253 -2.2%
Operating profit (EBDITA) 3,652 3,708 1.5% 7,259 6,461 -11.0%
EBDITA margin (%) 15.0% 15.7%   15.6% 14.5%  
Other income 1,424 1,472 3.4% 2,370 2,499 5.5%
Interest (net) 20 14 -32.0% 27 14 -48.0%
Depreciation 492 487 -0.9% 973 977 0.5%
Profit before tax 4,565 4,679 2.5% 8,629 7,969 -7.6%
Extraordinary income/(expense) (139)     (243) -  
Tax 1,250 1,315 5.2% 2,550 2,340 -8.2%
Profit after tax/(loss) 3,176 3,364 5.9% 5,836 5,629 -3.5%
Net profit margin (%) 13.0% 14.2%   12.6% 12.6%  
No. of shares (m) 101.2 101.2   101.2 101.2  
Diluted earnings per share (Rs)* 125.6 133.0   115.3 111.2  
Price to earnings ratio (x)**         20.8  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Bajaj Auto, with a capacity of 3.2 m vehicles, has a 28% market share in the two-wheeler segment (FY07 share). The company's sales mix (in terms of units sold) consists of motorcycles (87%), ungeared scooters (1%) and three-wheelers (12%). Though the company 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 28% in FY07. It has also entered into an agreement with Kawasaki for export of motorcycles for emerging markets.

What has driven performance in 2QFY08?
Exports lessen the damage: Bajaj Auto’s overall domestic volumes fell by 24% YoY during 2QFY08. Barring the scooter segment, which more than doubled its sales, albeit on a lower base, volumes of the other two segments suffered. Motorcycles, the company’s key segment, continued to suffer on account of tough industry conditions and the company’s own strategy of exiting the 100 cc segment. As a result, volumes were lower by 26% YoY, worse than the industry, where volumes fell 16% YoY. With the company launching a brand new bike ‘XCD’ in the 125cc segment in an attempt to win away customers from the high volumes 100cc segment, sales are likely to pick up from the second half. Furthermore, the company’s bikes continued to be a hit in select Latin American and Southeast Asian countries as is evident from the splendid growth in exports, where volumes were higher by 62% YoY. In fact, this helped cushion the fall in domestic volumes.

As far as three wheelers are concerned, lack of demand for commercial vehicles (goods carriers) continued to affect sales, resulting into a 9% YoY drop in volumes during 2QFY08.

Sales break-up…
Domestic 2QFY07 2QFY08 % change 1HFY07 1HFY08 % change
Motorcycles 544,860 404,544 -25.8% 1,042,276 784,035 -24.8%
Scooter/scooterette 3,683 7,694 108.9% 11,309 13,903 22.9%
3 Wheelers 47,735 43,637 -8.6% 91,524 79,724 -12.9%
Total 596,278 455,875 -23.5% 1,145,109 877,662 -23.4%
Exports            
Motorcycles 78,202 126,972 62.4% 148,973 241,523 62.1%
Scooter/scooterette 697 2 -99.7% 1,103 6 -99.5%
3 Wheelers 32,948 31,244 -5.2% 60,034 66,493 10.8%
Total 111,847 158,218 41.5% 210,110 308,022 46.6%
Grand total 708,125 614,093 -13.3% 1,355,219 1,185,684 -12.5%
Source: SIAM

Margin improvement a surprise: Bajaj Auto’s operating margins improved by 0.7% during 2QFY08. This is commendable, given the backdrop of spiraling prices of key commodities and the competition prevailing in the market that is not allowing players to completely pass on the price hikes. While other expenses were higher, raw material costs as a percentage of sales fell significantly and this helped company put in a better operating performance.

cost break up
(Rs m) 2QFY07 2QFY08 Change
Raw materials 17,692 16,363 -7.5%
% sales 72.6% 69.3%  
Staff cost 726 735 1.3%
% sales 3.0% 3.1%  
Other expenditure 2,290 2,817 23.0%
% sales 9.4% 11.9%  

While operating profits were higher by 2%, what further pushed the bottomline growth were the higher other income and lower interest and depreciation charges. The fact that the company incurred an extraordinary expense in the same quarter last year, also made profits look higher than they actually were. Absent the same, profits have grown by 2% YoY during the quarter.

In the last few quarters
While the topline performance of the company continues to disappoint, what is heartening to know is the fact that margins have started coming back on track. With the onset of the festive season, we expect the second half topline performance to be slightly better, thus enabling the company to record a positive growth in profits for the full year.

History in quarters…
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Net sales growth (% YoY) 30.5% 28.4% 6.8% -4.2% -3.0%
OPM (%) 15.0% 14.2% 14.1% 13.1% 15.7%
NPM (%) 13.0% 13.4% 13.3% 10.7% 14.2%

What to expect?
At the current price of Rs 2,510, the stock is trading at a multiple of 13 times our estimated FY10 cash flow. This is however not an appropriate way to value the stock, as we believe the current market price also seems to be factoring in the valuation of the company’s insurance business. Including the same though, we believe that the company is adequately valued from a medium term perspective and unless it shows significant outperformance in volumes in the next few months, we would continue to stick with our view.

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