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Bajaj Auto: Is it a buy? - Views on News from Equitymaster
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  • Nov 17, 2000

    Bajaj Auto: Is it a buy?

    Bajaj Auto Ltd (BAL), India's largest two wheeler manufacture has many positives to its credit. However some of the negatives are very strong, hence they cannot be ignored. Let us examine below some of its positives and negatives, to decide whether it is a buy or not at the current price level of Rs 259.


    • BAL's market share in the motorcycle industry has gone up to 21.6% for the period April-October 2000, overtaking TVS Suzuki's second position. BAL has been quick to take advantage of the shift in consumer preferences to motorcycles over scooters. It has stepped up its capacity in motorcycles and introduced new products aggressively. For April-October 2000, BAL sold 235,623 Japanese motorcycles, a growth of 94% YoY.

    • Even though, scooters are out of favour currently, it is likely to pick up in future. Scooters are preferred entry level vehicles in India. With income levels rising and the economy growing, there will be a certain segment wanting to buy scooters. BAL's forte in the past has been its scooter division. For October 2000, it has a market share of 61% in scooters and is best positioned to take advantage of an upswing in the scooter industry.

    • BAL is a cash rich company and has the ability to fund its future capex from internal accruals. As per March 2000 figures, total of its investments, cash and loans and advances was Rs 38 bn. Though the company has used Rs 7.3 bn of this to finance its buy back of shares, it is still sitting on a huge surplus. It could put this to use by increasing dividend payouts, invest or acquire companies where it earns a return higher than its cost of capital.

    • The company has successfully completed its buy back of shares. It has bought back 15% of the equity capital (18.2 m shares) at a price of Rs 400 per share, at a premium to its market price. This has enhanced the company's EPS from Rs 29.2 to Rs 34.5 (after our recent downgrade since the 2Q results).

    • Due to its strong cash position and experience in the two wheeler industry, BAL has the ability to come out with new products quickly. This can be seen with its entry into the motorcycle industry. It has already managed to grab the second highest market share in the industry.

    Volumes April-Oct 99 April-Oct 00 % change
    Scooters 405,541 279,568 -31.1%
    Sunny/Spirit 40,236 45,390 12.8%
    Step thrus 92,456 79,990 -13.5%
    Japanese Motorcycles 121,441 235,623 94.0%
    Three-Wheelers 98,489 99,001 0.5%
    Total 758,163 739,572 -2.5%


    There are some negatives of BAL, that cannot easily ignored.

    • The management's keen interest in the stock markets, where it has been using its surplus funds. This risk taking nature of the company is a concern for the common investor. In FY2000, the profit from trading of shares accounted for around 10.4 % of the company's net profit, definitely not a amount that can be overlooked. This may help in sprucing up its bottomline in one year, but the opposite may happen in the next year.

    • Bajaj Auto is currently trading at Rs 259, while its book value per share for March 2000 works out to Rs 268. Hence the discount to book value at current market prices is not very attractive.

    • Diversification into unrelated ventures like insurance, does put the returns of BAL at a higher risk. The returns from the insurance business will take time to show results.

    • Another important negative has been the company's decision to use its surplus funds. The company is planning to bid for Maruti Udyog Ltd's disinvesment and is also planning a foray into the insurance sector. There is a risk to the company, as to how these investments of it will perform in future.

    Bajaj Auto's (BAL) performance in the stock markets over the past few months has been lacklustre. The company's offer to buyback 18.2 m shares at a price of Rs 400 per share has failed to bring back life into the stock.

    Though there has been some buying interest lately, it is definitely not a stock in much demand. The volumes in BAL a year ago were on average 2,00,000 to 3,00,000 a day and currently hover around 1,00,000 to 1,50,000 on the BSE.

    When investors, value companies from the top down approach, then the management's risk taking nature does play an important role in determining whether it is a buy or not. On the current price of Rs 259 , BAL is trading at 7.5x on its FY01E EPS of Rs 34.5.



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