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Bajaj Auto: Profits up 87%

Oct 23, 2002

Bajaj Auto has posted an impressive performance for second quarter ended September 2002. While revenues have increased by 12.9% on the back of a 12.5% rise in volumes, net profits are lower by 8%. However, excluding extraordinary income of insurance premium received from Allianz in the corresponding quarter last year, net profit has actually leap-frogged by 88%.

(Rs m) 2QFY02 2QFY03 Change
Sales 9,298 10,500 12.9%
Other Income 317 397 25.1%
Expenditure 7,958 8,454 6.2%
Operating Profit (EBDIT) 1,339 2,046 52.7%
Operating Profit Margin (%) 14.4% 19.5%  
Interest 11 2 -86.6%
Depreciation 446 412 -7.6%
Profit before Tax 1,200 2,029 69.1%
Extraordinary item 681 (12) -
Tax 460 710 54.3%
Profit after Tax/(Loss) 1,420 1,308 -7.9%
Net profit margin (%) 15.3% 12.5%  
No. of Shares (m) 101.2 101.2  
Earnings per share (Rs)* 56.1 51.7  
P/E (x)   7.7  
(*annualised)      

The company continues to extend its market share in the motorcycle segment after the successful launch of 'Pulsar', the executive segment vehicle. Bajaj had targeted at achieving 120,000 units of 'Pulsar' by FY03. Apart from this new launch, Bajaj reduced prices on its key volume models like 'Boxer' and 'Caliber' in 2QFY03 after Hero Honda's special discount in 1QFY03. As a result, volume growth has been robust in the first half, which is evident in the table below. We expect the company's market share in the motorcycle segment to touch 25% levels by FY03.

Barring three-wheelers, the performance of Bajaj Auto in other segments like geared & ungeared scooters and step thrus have nothing much to write home about. Geared scooters, where Bajaj has a commanding market share of 78%, continued the downward trend in 1HFY03 due to change in consumer preference and competition from the motorcycle segment in terms of affordability. We expect Bajaj Auto to post around 24% fall in geared scooter volumes in FY03. Due to slowdown in economy, ungeared scooter segment that was growing till last year seems to have also felt the pinch. Similar to the moped segment, step thrus are also losing shine, as is apparent from a 20% fall in unit sales in 1HFY03 for Bajaj Auto.

First half performance…
(Nos) 1HFY02 1HFY03 Change (%)
Motorcycles 271,925 412,695 51.8%
Scooters-Geared 220,823 152,983 -30.7%
Scooters-Ungeared 33,578 32,582 -3.0%
Scooters-Total 254,401 185,565 -27.1%
Step thrus 35,614 28,429 -20.2%
Three wheelers 79,107 94,202 19.1%
Total 641,047 720,891 12.5%

Operating margins have increased during the quarter despite aggressive price reduction and discounts in the market. The company has been focusing on reducing raw material expenses by lowering imports and increasing productivity in the last three years, which have yielded positive results. That said, due to late entry in the motorcycle category, average realisation has been under pressure in the last three years and we expect this to dip even further in FY03, as well as in the future. The two-wheeler market, notably motorcycles, are offering a discount in the range of Rs 3,000-Rs 3,500 per vehicle. Though volume growth may increase at a faster rate in the festive season, it could also have a telling impact on margins.

Increase in cash flow from operations has enabled the company to retire debts (Rs 6.2 bn in FY02) and is reflected in lower interest outgo. While on first look, net profit has fallen by 8%. But the company received a premium of Rs 720 m from Allianz for life insurance venture in 2QFY02, which is included in extraordinary income. Excluding this unusual income, the rise in profit is an impressive 88%.

The stock currently trades at Rs 400 implying a P/E multiple of 8x annualised 2QFY03 earnings. As we have mentioned above, while the company's performance at the topline level is commendable, motorcycle segment is currently witnessing acute pressure on prices. Given the current sluggish macro economic environment, if demand were to peter down, margins could take a pounding in the coming quarters. The company hopes to keep volume growth ticking by introducing a new 125 cc motorcycle model in 3QFY03. However, new models are slowly turning out to be unprofitable considering the development and marketing costs involved in the same.

Besides, the consolidated picture of the company also is a cause of concern. Bajaj ventured into both life and non-life insurance in partnership with Allianz. Since insurance is generally a long-term business with pay back period starting in the fifth year from commencing operations, we expect consolidated profitability to remain subdued for the next four years. Given this backdrop, the stock might continue to remain volatile in the immediate term, which has been the case in the last few months.


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