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Bajaj Auto: Slowdown impacts volumes

Nov 2, 2012

Bajaj Auto announced the second quarter results of financial year 2012-2013 (2QFY13). The company reported a 4% YoY drop in revenues, while profits grew by 2% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 4% YoY during the quarter led due to continued slowdown in the domestic market and fall in volumes.
  • Operating margins decline marginally by 0.4% YoY to 18.4% on the back of higher staff costs and other expenditure (as a percentage of sales).
  • Net profits grow by 2% YoY. However, excluding the extraordinary expense in 2QFY12, net profits fall by 10% YoY.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Units sold 1,164,137 1,049,208 -9.9% 2,256,952 2,128,179 -5.7%
Net sales 51,854 49,724 -4.1% 98,917 98,381 -0.5%
Expenditure 42,099 40,572 -3.6% 80,763 80,512 -0.3%
Operating profit (EBDITA) 9,755 9,152 -6.2% 18,153 17,869 -1.6%
EBDITA margin (%) 18.8% 18.4%   18.4% 18.2%  
Other income 1,564 1,667 6.6% 3,005 3,487 16.0%
Interest (net) 202 2   205 3  
Depreciation 394 410 4.1% 701 763 8.9%
Profit before tax 10,722 10,407 -2.9% 20,253 20,591 1.7%
Exceptional items (954) -   (954) -  
Tax 2,510 3,000 19.5% 4,930 6,000 21.7%
Profit after tax/(loss) 7,258 7,407 2.0% 14,369 14,591 1.5%
Net profit margin (%) 14.0% 14.9%   14.5% 14.8%  
No. of shares (m)       289.4 289.4  
Diluted earnings per share (Rs)*         105.9  
Price to earnings ratio (x)*         17.9  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 2QFY13?
  • Bajaj Auto fell by 4% YoY on the back of a 10% YoY decrease in volumes during the quarter. Total motorcycle volumes fell by 10% YoY, while three-wheeler sales fell by 12% YoY during the quarter.

    Domestic motorcycle sales formed about 57% of the total volumes during the quarter but declined by 12% YoY. This was due to slowdown in the economy and subdued demand with the domestic motorcycle industry declining by 9% YoY. Motorcycle exports did relatively better but did decline by 5% YoY. While Africa did well, in other markets, in-line with overall global slowdown, demand remained subdued. In the three-wheeler segment, overall volumes declined by 12% YoY largely due to the 22% YoY fall in export volumes. That said, due to the price rationalization in Sri Lanka, average sales recovered to around 7,500 vehicles per month. Further, the loss on sales in Sri Lanka was partially offset with gains in Egypt. Domestic volumes in this segment grew by 3% YoY against a flat industry growth.

  • Bajaj Auto's operating profits fell by 6% YoY on the back of a 0.4% YoY margin contraction during the quarter. The key reason for the same was higher staff costs and other expenditure (as a percentage of sales). Other expenditure increased from 5.9% in 2QFY12 to 6.7% in 2QFY13.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials/ purchases 37,624 35,686 -5.2% 72,283 70,767 -2.1%
    % sales 72.6% 71.8%   73.1% 71.9%  
    Staff cost 1,392 1,532 10.0% 2,823 3,136 11.1%
    % sales 2.7% 3.1%   2.9% 3.2%  
    Other expenditure 3,083 3,353 8.8% 5,657 6,609 16.8%
    % sales 5.9% 6.7%   5.7% 6.7%  
    Total expenditure 42,099 40,572 -3.6% 80,763 80,512 -0.3%

  • Fall in Profit before taxes (PBT) at 3% YoY was lower than operating profits due to reduction in interest costs. Net profits grew by 2% YoY during 2QFY13. However, if one excluded the extraordinary expense during 2QFY12, net profits fell by 10% YoY.

What to expect?
At the current price of Rs 1,899, the stock trades at a multiple of 13.5 times our estimated FY15 earnings per share and at a multiple of 13 times our expected FY15 cash flow per share.

The management is quite confident on the long term outlook of the company and intends to focus on profitable products going forward. For FY13, the management had given a guidance of achieving volumes of 5 m units which could be a bit challenging given the subdued demand conditions in the domestic market and the fall in export volumes during the first half of the year. At the current price, we have a 'Sell' view on the stock.

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