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Bajaj Auto: Margins hit a roadblock…

Oct 20, 2004

Performance Summary
Bajaj Auto, India’s second largest two-wheeler manufacturer has witnessed pressure at the operating level during 2QFY05. As a consequence, despite a robust 15% YoY growth in topline during the quarter, the bottomline has witnessed an 11% fall. Decline in other income and higher tax provisioning have also contributed to the drop in net profits.

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 to emerging markets.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 12,632 14,483 14.6% 23,454 26,744 14.0%
Expenditure 10,293 12,088 17.4% 19,555 22,505 15.1%
Operating profit (EBDITA) 2,339 2,395 2.4% 3,899 4,239 8.7%
EBDITA margin (%) 18.5% 16.5%   16.6% 15.9%  
Other income 1,034 883 -14.6% 2,051 1,947 -5.1%
Interest (net) 6 1 -89.1% 8 2 -69.3%
Depreciation 438 464 5.9% 872 926 6.2%
Profit before tax 2,929 2,813 -4.0% 5,071 5,258 3.7%
Extraordinary item (196) (168)   (214) (183)  
Tax 710 850 19.7% 1,240 1,650 33.1%
Profit after tax/(loss) 2,023 1,795 -11.3% 3,617 3,425 -5.3%
Net profit margin (%) 16.0% 12.4%   15.4% 12.8%  
No. of shares (m) 101.2 101.2   101.2 101.2  
Diluted earnings per share (Rs)* 80.0 70.9   71.5 67.7  
Price to earnings ratio (x)   13.8     14.5  
(* annualised)            

What has driven performance in 2QFY05?
Motorcycles lead the charge: Total two-wheeler sales were higher by 19% as compared to same quarter last year. The growth was led primarily by the motorcycles segment, whose volumes jumped by 35% YoY. Apart from ‘Pulsar’, the most successful bike to come out of the company’s stable to date, what also contributed to volumes growth was ‘Boxer CT100’, its offering in the entry level segment. The bike, which was launched earlier this year has met with good success till now and has been able to dislodge rival Hero Honda’s ‘Dawn’, from the number one spot in the segment. Market share of the company improved and stood at 28% as compared to 24% during 1QFY05.

Its other two-wheelers portfolio however, continued to shrink and witnessed a significant 36% YoY decline in volumes. It also continued to remain a drag on the two-wheeler volumes of the company and restricted the overall two-wheeler volume growth to 19%. During the year, the company also launched a new goods carrier in the three-wheeler segment and this seems to have helped it to witness a 7% growth in three-wheeler volumes during the quarter.

Segment 2QFY04 2QFY05 %change 1HFY04 1HFY05 %change
Motorcycles 250,133 336,425 34.5% 490,663 612,211 24.8%
Total 2 wheelers 320,046 380,514 18.9% 622,576 699,345 12.3%
Three-wheelers 60,227 64,681 7.4% 105,229 118,759 12.9%
Grand total 380,273 445,195 17.1% 727,805 818,104 12.4%

Operating profits: As far as the operating performance is concerned, raw material expenses have accounted for much larger chunk of the company’s topline as compared to same quarter last year. Key inputs such as steel and rubber have become dearer vis-à-vis last year and as a consequence have taken a big bite off the company’s operational revenues. While savings on the wages front is a welcome gain and could be attributed to the company’s efforts over the last few years at rationalizing its workforce, the gain is still not enough to mask the rise in input costs. As a result, operating margins have taken a hit of nearly 200 basis points during the quarter.

Cost break-up…
(Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
Raw materials 8,046 9,973 24.0% 14,941 18190 21.7%
% sales 63.7% 68.9%   63.7% 68.0%  
Staff cost 715 592 -17.1% 1,339 1282 -4.2%
% sales 5.7% 4.1%   5.7% 4.8%  
Other expenses 1,532 1,522 -0.7% 3,276 3032 -7.4%
% sales 12.1% 10.5%   14.0% 11.3%  

Net profits: Apart from operating level pressure, what has also led to the bottomline decline is the 15% drop in other income and a higher tax provisioning to the tune of 20%. The company has the policy of having large investment portfolio and seems to have booked lesser gains from the same during the quarter as compared to last year.

What to expect?
At Rs 980, the company trades at a P/E of 14.5 times its annualised 1HFY05 earnings. The company’s track record at launching successful motorcycles over the last few years and the strength of its balance sheet does inspire confidence in the long-term ability of the company to grow at a robust rate. However, steady decline in the fortunes of its scooter division and intensifying competition in the motorcycles segment does increase the risk profile of the stock.

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