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Bajaj Auto: Healthy ramp up in margins
Oct 21, 2013

Bajaj Auto announced the second quarter results of financial year 2013-2014 (2QFY14). The company reported a 4% YoY growth in revenues, while net profits grew by 13% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 4% YoY during the quarter despite the 8% YoY drop in volumes due to higher realisations.
  • Operating margins improve by 3.5% YoY to 21.9% in 2QFY14 on the back of lower raw material costs (as a percentage of sales).
  • Despite the 24% YoY growth in operating profits, net profit growth is lower at 13% YoY on account of lower other income and higher tax expenses.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Units sold 1,049,208 961,330 -8.4% 2,128,179 1,940,605 -8.8%
Net sales 49,724 51,749 4.1% 98,381 á100,860 2.5%
Expenditure 40,572 40,429 -0.4% 80,512 80,473 0.0%
Operating profit (EBDITA) 9,152 11,320 23.7% 17,869 20,387 14.1%
EBDITA margin (%) 18.4% 21.9%   18.2% 20.2%  
Other income 1,667 1,242 -25.5% 3,487 2,998 -14.0%
Interest (net) 2 0   3 1 -50.0%
Depreciation 410 443 7.9% 763 887 16.3%
Profit before tax 10,407 12,118 16.4% 20,591 22,496 9.3%
Tax 3,000 3,746 24.9% 6,000 6,748 12.5%
Profit after tax/(loss) 7,407 8,372 13.0% 14,591 15,748 7.9%
Net profit margin (%) 14.9% 16.2%   14.8% 15.6%  
No. of shares (m)       289.4 289.4  
Diluted earnings per share (Rs)*         109.2  
Price to earnings ratio (x)*         19.7  
(* On a trailing 12-month basis)

What has driven performance in 2QFY14?
  • Bajaj Auto's revenues rose by a mere 4% YoY during the quarter on account of an 8% YoY drop in volumes. Total motorcycle volumes fell by 8.5% YoY largely due to the slowdown in both the domestic and the export markets, while three-wheeler volumes fell by 7% YoY during the quarter. Export revenues were up 26% YoY during the quarter largely on account of growth in three-wheeler sales and depreciation of the rupee against the dollar.

  • Bajaj Auto's operating profits grew by a healthy 24% YoY largely on the back of a 3.5% YoY margin expansion to 21.9% during the quarter. The key reason for the same was lower raw material costs (as a percentage of sales), which decreased from 71.8% in 2QFY13 to 67% in 2QFY14. This was mainly on account of the depreciation of the rupee against the dollar as the cost per vehicle remained flat.

    Cost break-upů
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials/ purchases 35,686 34,686 -2.8% 70,767 68,752 -2.8%
    % sales 71.8% 67.0%   71.9% 68.2%  
    Staff cost 1,532 1,834 19.7% 3,136 3,670 17.0%
    % sales 3.1% 3.5%   3.2% 3.6%  
    Other expenditure 3,353 3,910 16.6% 6,609 8,051 21.8%
    % sales 6.7% 7.6%   6.7% 8.0%  
    Total expenditure 40,572 40,429 -0.4% 80,512 80,473 0.0%

  • Despite the 24% YoY growth in operating profits, net profit growth was lower at 13% YoY on account of reduction in other income and higher tax expenses.

What to expect?
    At the current price of Rs 2,152, the stock trades at a multiple of 13.7 times our expected FY16 cash flow per share. Given the headwinds that the auto industry is currently facing, Bajaj Auto expects the two wheeler industry to grow by around 2% for the fiscal. On the exports front, even though growth in Sri Lanka has been flat, the company expects the other markets to ramp up going forward especially Africa. Bajaj Auto's outlook on three wheelers is positive on the back of launch of upgrades and release of new permits. Overall, although the fundamentals of the company are very good, because valuations are expensive, there is not much upside on the table for investors. And hence we have a 'Sell' view on the stock.

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