Operational efficiencies, export performance and a focus on the higher capacity bikes will boost revenues and margins for Bajaj Auto.
In a scenario where net profits of auto makers have fallen by half in some cases, two wheeler makers have not done too badly. While profits are still down, macroeconomic conditions and cost cutting measures could signal an improvement going forward. One beneficiary of this is India’s second largest two-wheeler maker, Bajaj Auto. In a gloomy scenario, the company has largely held steady as far as profit margins and market shares are concerned.
Encouraging numbers
Despite a 31 per cent drop in volumes year-on-year (y-o-y) to about 5 lakh vehicles for the December 2008 quarter (see table: Stabilising) due to sluggish domestic demand, the company has been able to sustain its realisations and margins. While net realisations per vehicle have improved by 20 per cent to about Rs 40,000, operating profit per vehicle is up about 13 per cent to Rs 4,200 (thanks to improved product mix). Gains from the ongoing cost cutting measures like staff reduction by two thirds due to VRS/retirement, continuous vendor rationalisation to about 200 key suppliers and plant shutdowns, have now started reflecting on the numbers. While operating profit margins are up by 90 bps quarter-on-quarter (q-o-q) to about 14.5 per cent in Q3, they are marginally down (20 bps) on a y-o-y basis. If the numbers hold going forward and the company’s strategy and emphasis on higher capacity vehicles succeeds, the quarter could signal the start to a significant improvement in operations.
The mid-range focus
Buoyed by higher sales from the launch of Platina 125 in September 2008, the company launched the XCD 135 (price Rs 45,000 per bike) recently underlining its 125cc+ focus for Platina (entry level), Discover, XCD (executive) and Pulsar (premium) going forward. Bikes over 125 cc+ now constitute over 63 per cent of the company’s sales as compared to 56 per cent in Q2 FY09. The company will be launching five more bikes in the higher capacity segment over the next few months.
| HOPE AHEAD | |||
| in Rs crore | FY08 | FY09 | FY10 |
| Net sales | 8,663 | 8,550 | 9,405 |
| EBIDTA | 1,294 | 1,112 | 1,317 |
| Net profit | 756 | 684 | 846 |
| P/E | - | 9.12 | 8.6 |
| E: Estimates | |||
Going by the realisations achieved on the sales of Platina, more launches in this segment could significantly improve the margins per vehicle going ahead. Analysts believe that while there is stiff competition in the entry level market (100 cc, Rs 35,000 per bike market) with all the three manufacturers having decent shares, it is the Rs 40,000-Rs 45,000 market for the 100 cc (Splendour) that has helped Hero Honda score over its rivals. With 100 cc Platina hardly making money, Bajaj Auto is targeting this segment by introducing features rich, higher power 125 cc variants at a competitive price.
Looking out
Exports is another area where the company has been doing well and would like to expand its share. Thanks to the y-o-y 40-50 per cent jump in volumes over the last few quarters (see chart: Outward bound), exports now constitutes about 44 per cent of sales. Analysts, however, say that with markets such as South America slowing down, and the base growing substantially, growth rates though healthy are likely to trend down. While margins for the domestic and export markets are about the same, weakening of the rupee is likely to tilt the balance in favour of exports if the company gets its hedging (currently 65 per cent of exports) strategy correct. While the company’s focus on key African markets going ahead might boost volumes, it might not aid to margins due to aggressive pricing, believe analysts.
Investment rationale
While the company has been receiving flak for not being able to penetrate rural markets as well as its rival Hero Honda (benefited from higher penetration, four consecutive good monsoons), it has fine-tuned its product mix and will continue to target semi-urban and city segments to improve its fortunes. Its push into various markets including the rural segment is likely to be aided by lower operating costs for the consumer (due to fuel price cuts), availability of finance (over 50 per cent of portfolio) from PSU and private banks (which had earlier refrained from lending) and lower bike prices (decline in input costs).
If raw material costs, which are experiencing a downtrend (down by a fifth for the December quarter), fall further by another 20 per cent, it could save the company about Rs 300 crore per quarter and improve margins. However, part of the gains is likely to be passed on to the consumers (through price cuts or added features) as the company focuses on improving volumes. While its nearest competitor, Hero Honda has done better than Bajaj Auto in the recent quarters, the company’s 125cc + strategy, robust export sales, and stabilising margins should bear fruits and visibly reflect in financials. Thus, the stock price could move up in the coming quarters. At Rs 474, the stock is trading at 8.6 times its FY10 estimated EPS of Rs 55 and should fetch 18 per cent returns over the next one year.