Bajaj Auto: Taking the bull by the horns - Outside View by Luke Verghese

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Bajaj Auto: Taking the bull by the horns
Jul 19, 2011

Bajaj Auto is taking the bull by the horns and is none the worse for it. The company is superbly run as witnessed by its superior funds management skills. The booming economy, the gross neglect of the public transportation environment, and the yearning to own a personalised transport vehicle are the other big factors. The inexorable rise of the tertiary sector will be a lodestar of sorts in the continued wellbeing of this company.

An all weather stock in the making

It is a slickly produced annual report alright - entirely keeping in tune with the exalted state of mind at Bajaj Auto's corporate headquarters. A glossy four color cover display of the Pulsar adorning the outside front cover, and carried over to the inside front cover, with a similar take on the two back covers for starters. This is further accentuated by a four color format of the directors' report to the shareholders along with other written matter, and printed on quality paper - not to be sniffed at. It would have cost a bomb no doubt to bring each copy off the printing press. So who is complaining? The pre-tax profit in 2010-11, rocketed to Rs 36 bn from Rs 25 bn previously you see, and the management decided to loosen the purse strings in consonance with the Digital Twin Spark Ignition (DTSi) engine's adrenaline pumping performance.

The company plonks out its 2 and 3 wheelers from its three plants - two in Maharashtra (Waluj and Chakan) and one in Uttarakhand, with the erstwhile factory at Akurdi, Pune in a comatose stage. It may not be out of place to state here that the immediate family is partaking only too well in this revv up - the four Bajaj's on the company's payroll (Rahul, Madhur, Rajiv, Sanjiv) collectively took home an ice cool remuneration of Rs 216 m in the latest year. Excluded from this list are three other Bajaj family deities, Shekhar, Niraj, and Manish Kejriwal, the son-in-law of Rahul, who had to make do with a mere Rs 1.7 m as directors' fees. But let that be.

Daredevil financial management

Such was the euphoria that the management even went to town on its daredevil financial management practices. It is the first listed company that I have surveyed which actually chortles at its ability to run its day to say functioning on negative working capital. That is to say that it owes more money to its working capital creditors, than is owed to it by its working capital debtors. This can at times lead to a tricky situation as debtors can suddenly go belly up, or delay payments for whatever reason, but rarely do creditors 'default' in demanding their tithes, on due date. In such an event, it can accentuate its payables even more. Consequently, all conservatively run companies make an effort to present the sunny side of the net current assets position at year end, by maintaining a gross current asset position which is atleast 50% excess of gross current liabilities - even if this book entry is drummed up only for the one important day of the year. This is also the text book definition of standard prudent financial management.

The Management discussion and analysis report says that that the company succeeded in maintaining a negative working capital of Rs 3.7 bn. In reality if one looks at the big picture the situation at year end was a lot more acute. The excess of gross current liabilities and provisions over gross current assets was close to Rs 11 bn. The net effect of a tight cash flow management is that the company gets to save on working capital interest payments. Not that the company is on hock. In 2010-11 the total interest debited to the profit and loss account was a miniscule Rs 17 m, against Rs 60 m previously. It boasted a loan portfolio of a mere Rs 3.2 bn at year end against an outstanding of Rs 13.8 bn previously.

The makeup of this miniscule borrowing is very instructive. It included an interest free sales tax deferral loan of Rs 1.6 bn (unfortunately down from Rs 13.3 bn previously as it was pre-paid) negotiated under some package scheme of incentives. Are these guys so hard up especially when the company had free investments to the tune of Rs 37 bn at year end, (the holding in debt securities runs into 18 pages) not including cash and bank balances in excess of Rs 5.5 bn? In any case why miss out on a free meal ticket if it is coming your way.

Racing ahead

But inspite of such eccentricities, the company is top dog in its performance. It recorded a gross manufacturing turnover of Rs 169 bn, which is up almost 40% over that of the preceding year. Pretax profits before exceptional items too rose in line, by a little over 40% to Rs 36 bn. The rise in pretax profits got quite some boost from the growth in other income. Other income rose from Rs 5.3 bn to Rs 9.8 bn - a rise of 83%. This other income includes sales related other income classified as 'Export incentives' amounting to Rs 4.4 bn against Rs 3 bn previously. Also lending a helping hand was interest income from debt securities which rocketed to Rs 3.3 bn from Rs 970 m previously.

The value of exports zoomed to Rs 45 bn from Rs 32.5 bn previously, and the export incentives rose in tandem. Volume exports of 2 wheelers accounted 29% of all two wheeler sales, while volume exports of three wheelers accounted for 53% of all 3 wheeler sales. Figuratively speaking, exports of two and three wheelers rose to 1.2 m numbers, from 0.9 m previously - an increase of 35%. (The category classified as Africa and the Middle East accounts for close to 50% of all exports, while South Asia takes second spot at 28%. Next in line is Latin America with a 17% share and South East Asia bringing up the rear end with 9%). What is interesting here is that a large swatch of moneyed mother earth is still untouched. The European continent, North America, and the Far East are apparently still too hot to handle, for whatever reason.

What helped the company ratchet up the turnover was the sharp increase in the volume production and volume sales of two and three wheelers. Production accelerated by 34% to 3.8 m, while volume sales grew by a similar margin to 3.8 m. In other words the company has perfected the art of just in time production. Consequently the stocks at year end stood at a minuscule 74,000 pieces odd. (This does not necessarily mean that the company sold all that it produced, as the invoices are invariably raised on its dealers). More likely the company has also perfected the art of dumping all that it produced on its dealer network, and then make them shoulder the rest of the burden. Whatever, the company also manages to sell cash down, as witnessed by the meager outstanding debtors position of Rs 3.6 bn at year end. The measly provisions that it sets aside for doubtful debtors on its debtors' outstanding, is also a measure of its hold on the market. It is literally bad debts free on the sales front! That is an achievement of sorts alright.

Market shares

Bajaj Auto market share as a result of this sudden spurt in volumes has led to it controlling a little over 32% of the total market in 2010-11. It has not been all that smooth sailing in the last six year though in the 2 wheeler segment. From a market share of 30.8% in 2006 it touched a peak of 33.5% the next year, and then slipping to 28% in 2009 before accelerating once again. It is a rough and tumble gladiators arena out there. The company has not given a similar take on the three wheeler segment, barring the learned comment that it controls 55% of the all India market in this sector. Exports are the big draw here rising from Rs 9 bn to Rs 45 bn over the last six years. The statistics that the company trots out for the different segments is not uniform, nor based on any particular logic or reasoning.

Inventory management is another area where this company excels. The total value of inventories at year end is a mere Rs 5.5 bn against Rs 4.5 bn previously. That is a mere 3% of the gross sales value for the year. The company must be saving a bundle in funds management costs by paring inventories to the bone. In the last two years the company has spent a mere Rs 3.2 bn in capital expenditure. This in turn has led to an increase in its installed capacity of 2 and 3 wheelers to 5 m numbers from 4.3 m numbers previously - or put in perspective a growth of 18%. Production in turn rose 34% to 3.8 m numbers, while the installed capacity utilization in 2010-11 was 76% of the new capacity. The employee strength is not known but the company keeps a tight lid on the total emoluments - the total payout excluding to directors amounting o Rs 4.7 bn, up from Rs 4 bn previously.

Cross border companies

Thankfully this is also one management which has as yet found only a minimum number of cross border outlets to route its riches. India Incs' favorite watering holes are - Mauritius, The British Virgin Islands, among a host of other exotic locales. Bajaj Auto boasts a piddling few foreign outings - a company in Netherlands, which hosts Bajaj Auto International, involving an equity outlay of Rs 9.2 bn, followed by its investment in PT Bajaj Auto, Indonesia which took away another Rs 1.4 bn. (The Netherlands company was formed to focus on international ventures, including possible acquisitions).This subsidiary in turn holds a 39.7% stake in KTM Power Sports AG, Austria, at a total outlay of Euro 154 m. The latter is apparently the second largest sports motorcycle manufacturer in Europe - and its core competence is technology and design.

The Netherlands based company is an oddity so far- to be fair most foreign subsidiaries blow one's mind away. Bajaj Auto acquired the shares in this 'dummy' that it set up at a premium to the face value which takes one's breath away. It holds 2,000 shares of Euro 100 each for a total value of Rs 9.2 bn. This works out to a per share acquisition price of Rs 4.6 m! One would imagine that this company owns the Kimberley diamond mines or something. No such luck. It does not even boast of any revenues as yet. It has a paid up capital of Rs 12 m, share premium reserves of Rs 9.8 bn, but other negative reserves of Rs 1.5 bn! It has total assets of Rs 8.2 bn, which includes investments valued at Rs 4.4 bn. The latter probably represents its stake in KTM Power Sports. It did not record any turnover but still managed the not so extraordinary feat of recording a profit before tax of Rs 220 m. How in heavens name can the profit be more than the revenues? Besides, its investments in KTM an established company, does not appear to generate any dividend returns - or am I mistaken here?

The Indonesian venture is as yet another struggle against the competitive forces. The Bajaj brand equity does not as yet appear to carry enough mileage with our neighbor. This subsidiary incorporated in 2007 assembles and markets the Pulsar range. Inspite of an 81% increase in volume sales to 21,586 vehicles, it is yet to break even - but appears to be on the mend.

The future

Bajaj has finally got everything going for it. It has mastered the art of producing quality vehicles and incorporating advanced manufacturing practices, which helps it to also price its products competitively. Add to this the sharp rise in the disposable incomes of Gen-Next who are its principal customers and you have a double whammy. (The deplorable state of our public transport is no doubt a big booster to the fortunes of two wheeler manufacturers).The express desire to own a vehicle of convenience has not come in not a day too soon - and the creaking level of our road infrastructure adds to the demand. The inexorable rise of the services sector which is now the biggest constituent of the gross domestic product is another prime reason. And factor in the breakthrough that it has achieved on the export front and it is a winner all the way. As a matter of fact matters are shaping up so well the company even slashed advertising expenditure to Rs 810 m from Rs 1.4 bn previously. Last but not the least it is the end product of the management's belief that the biggest beneficiary of a well run company is the management.

What will always keep the two wheeler segment whistling along inspite of the drastic fall in the resale value of the car segment is the cost of maintenance of the latter. And the periodic hike in petrol and diesel prices only adds to the anomaly. The autoricksa is here to stay too-for reasons which are not too different from the demand for two wheelers.

Disclosure: I hold 202 shares in Bajaj Auto

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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