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Bajaj Auto: Hit hard at the net level - Views on News from Equitymaster

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Bajaj Auto: Hit hard at the net level
Oct 31, 2011

Bajaj Auto announced the second quarter results of financial year 2011-2012 (2QFY12). The company reported a 16% YoY increase in revenues, while profits grew by 6% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 16% YoY during the quarter led by healthy growth in volumes.
  • Operating margins contract by 0.6% YoY on the back of higher input costs (as a percentage of sales).
  • Growth in net profits is slower at 6% YoY despite a strong growth in operating profits. This is on account of higher interest costs and depreciation charges as well as extraordinary losses.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Units sold 1,000,570 1,164,137 16.3% 1,928,906 2,256,952 17.0%
Net sales 43,418 52,673 21.3% 82,319 100,446 22.0%
Expenditure 34,447 42,099 22.2% 65,578 80,763 23.2%
Operating profit (EBDITA) 8,972 10,574 17.9% 16,741 19,682 17.6%
EBDITA margin (%) 20.7% 20.1%   20.3% 19.6%  
Other income 837 745 -11.0% 1,654 1,476 -10.8%
Interest (net) 7 202 3010.8% 13 205 1497.7%
Depreciation 300 394 31.6% 618 701 13.4%
Profit before tax 9,503 10,722 12.8% 17,764 20,253 14.0%
Exceptional items - (954)   - (954)  
Tax 2,682 2,510 -6.4% 5,042 4,930 -2.2%
Profit after tax/(loss) 6,821 7,258 6.4% 12,722 14,369 12.9%
Net profit margin (%) 15.7% 13.8%   15.5% 14.3%  
No. of shares (m)       289.4 289.4  
Diluted earnings per share (Rs)*         99.4  
Price to earnings ratio (x)*         17.7  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 2QFY12?

  • Bajaj Auto reported a revenue growth of 21% YoY on the back of a 16% YoY increase in volumes during the quarter. Average realisations (on total operating income) increased by over 5% YoY.

    The company in total sold 1,164,137 units during 2QFY12 as compared to 1,000,570 units in the corresponding quarter last year. Total motorcycle volumes grew by 16% YoY and formed about 88% of the total unit sales. Three-wheeler sales rose by 17% YoY to 136,780 units.

    Domestic motorcycle sales formed about 59% of the total volumes during the quarter and grew by 8% YoY. Motorcycle exports did better to grow by 37% YoY to stand at about 342,686 units (22% of total volumes). Volume sales of the company's two flagship brands - Pulsar and Discover - averaged at about 86,000 units and 133,000 units per month respectively.

    In the three-wheeler segment, the 17% YoY volumes growth was largely led by exports. While three-wheeler exports grew by a robust 44% YoY, domestic sales declined by 9% YoY as high interest rates and fuel prices dampened demand. Three-wheeler exports formed about 60% of the total three-wheeler sales during the quarter. Total three-wheeler volumes formed about 12% of total unit sales.

  • Bajaj Auto's operating profits increased at a slower pace as compared to the increase in revenues on the back of a 0.6% YoY margin contraction during the quarter. The key reason for the same was higher costs of raw materials and purchases (as a percentage of sales). Raw material and purchases costs rose by 22.5% YoY in absolute terms, while employee and other expenses increased by 15% YoY and 22% YoY respectively.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials/ purchases 30,712 37,616 22.5% 58,394 72,280 23.8%
    % sales 70.7% 71.4%        
    Staff cost 1,142 1,311 14.8% 2,405 2,700 12.2%
    % sales 2.6% 2.5%        
    Other expenditure 2,593 3,173 22.3% 4,779 5,784 21.0%
    % sales 6.0% 6.0%        
    Total expenditure 34,447 42,099 22.2% 65,578 80,763 23.2%

  • Surge in interest costs, higher depreciation charges and extraordinary losses took their toll on the bottomline, which grew at a much slower pace of 6% YoY. The company incurred extraordinary losses to the tune of Rs 95 bn during the quarter, which was an MTM loss on the valuation of certain range forward contracts. Excluding the same, growth in net profits stood at 20% YoY.
What to expect?
At the current price of Rs 1,762, the stock trades at a multiple of 14 times our estimated FY14 earnings per share and at a multiple of 13.4 times our expected FY14 cash flow per share.

The management is quite confident on the long term outlook of the company. Bajaj Auto has gone in for a price hike across products (domestic and exports). And as such would help it offset the impact of the rising prices to a certain extent.

Further, the company is looking at expanding its dealer network. These would be located in the semi-urban and rural markets and would eventually help in boosting volumes. Although uncertainty is likely to persist in the domestic market in the near term due to a high interest rates and fuel prices, the company expects exports to do pretty well.

On an overall basis, we are confident of the company's long term outlook despite short term concerns. Having said that, the stock price of the company has run up in recent times and at the current levels looks fairly valued.

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