• OCTOBER 22, 2003

Bajaj Auto: The other income fillip

Bajaj Auto, the second largest player in the Indian two-wheeler market, has posted a 54% rise in net profit for the second quarter ended September 2003. While turnover has grown at an encouraging pace, operating margins have declined on account of additional charges towards VRS and higher input costs. A significant rise in other income has enabled the strong net profit growth in 2QFY04.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Sales 10,500 12,632 20.3% 21,182 23,454 10.7%
Other Income 397 1,034 160.5% 743 2,051 176.2%
Expenditure 8,454 10,293 21.7% 17,170 19,555 13.9%
Operating Profit (EBDIT) 2,046 2,339 14.3% 4,012 3,899 -2.8%
Operating Profit Margin (%)19.5%18.5% 18.9%16.6% 
Interest 2 6 266.7% 5 8 56.3%
Depreciation 412 438 6.4% 843 872 3.5%
Profit before Tax 2,029 2,929 44.4% 3,907 5,071 29.8%
Extraordinary item (12) (196) - (12) (214) -
Tax 710 710 0.0% 1,370 1,240 -9.5%
Profit after Tax/(Loss) 1,308 2,023 54.7% 2,526 3,617 43.2%
Net profit margin (%)12.5%16.0% 11.9%15.4% 
No. of Shares (m) 101.2 101.2   101.2 101.2  
Earnings per share (Rs)* 51.7 80.0   49.9 71.5  
P/E (x)     12.1  

Net sales has risen by 20% in 2QFY04, which is much higher than the 1% growth posted by the company in 1QFY04. This was account of robust rise in motorcycle sales in the September quarter (27% growth YoY). It has to be remembered that the transporters' strike in 1QFY04 affected volumes sales. But Bajaj has managed to compensate for the decline in 1QFY04 in the second quarter of this fiscal. The launch of 'Wind', the world motorcycle, has played a vital part in providing a fillip to the topline. To put things in perspective, volume sales of motorcycles in September 2003 at more than 95,000 units is the highest since April 2001 (see graph).

Volume snapshot…
Segment1QFY031QFY04% change2QFY032QFY04% change
Motorcycles 216,376 240,530 11.2% 196,319 250,133 27.4%
Scooters-Geared 85,420 42,596 -50.1% 67,563 43,355 -35.8%
Scooters-Ungeared 13,138 11,393 -13.3% 19,444 17,620 -9.4%
Step thrust 13,832 8,011 -42.1% 14,597 8,938 -38.8%
Three wheelers 43,604 45,002 3.2% 50,598 60,227 19.0%
Total volumes 372,370 347,532 -6.7% 348,521 380,273 9.1%
Total two-wheelers 328,766 302,530 -8.0% 297,923 320,046 7.4%

Apart from motorcycles, the performance of other segments like geared, ungeared scooters, step-thrus and three-wheelers are in line with our FY04 estimates. The company's new launch in the three-wheeler market pertaining to goods carriers has paid rich dividends (average monthly volumes in 2QFY04 is 19,500 units compared to 16,300 units in FY02). Bajaj continues to lose out on the ungeared scooter market front, which has been growing at 8% annually. The company's market share came down from 17% in FY02 to 12% in FY03, which we expect to touch 11% levels in FY04.

Operating margins are lower by 100 basis points on account of charges pertaining to the ongoing voluntary retirement scheme and higher raw material prices. If one were to adjust for the additional charges to the tune of Rs 76 m, the decline in margins is actually 40 basis points. For 1HFY04, the decline in margins is on the higher side, which is basically due to 1QFY04 effect (transporters' strike). Having said that, except for the three-wheeler segment, the company's ability to raise prices is limited. In this context, we expect margins to decline in the medium term as well.

Other income has risen notably in 1HFY04. This includes dividends from mutual funds Rs 748 m and profit on sale of investments of Rs 694 m (70% of other income in 1HFY04). Extraordinary item here pertains to prior period adjustments and worker compensation. If one were to exclude other income and the extraordinary effect, net profit has actually risen by 28%.

The stock currently trades at Rs 864 implying a P/E multiple of 12.1x annualised 1HFY04 earnings (14.6x FY04E earnings). Valuations seem to be on the higher end on a peer value basis even if one were to account for upside from exports. While the company is rich in cash (almost Rs 300 per share), dividend payout compared to earnings growth has been low. Given the intensity of competition in the two-wheeler sector and absence of pricing power, we expect profits to grow at a slower rate in FY05.

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