Buoyed by the demand for its Discover range of motorcycles, the country’s second largest two-wheeler maker, Bajaj Auto, posted healthy numbers for the second quarter in a row. The company, which had been struggling with weak demand, lack of auto financing and sluggish exports in 2008-09 was able to make a hit out of its Discover 100cc bike boosting revenues and market share in the current year.
Volume play
While the company saw its sales volumes in December quarter 2009 rise 64 per cent year-on-year on a low base, it managed to better its September quarter performance by 18 per cent due to continuing strong demand for its bikes. Since the launch of its Discover 100cc bike in September, the company has so far sold 3.7 lakh units of the Discover range with a majority coming from the 100cc version. The company expects its two key brands (Discover and Pulsar) to generate about 60 per cent of volumes. It is targeting monthly volumes of 1 lakh units for the Discover brand (currently 86,000) and 80,000 units for the Pulsar (currently 44,000) following the launch of the Pulsar 135 last month. The increasing volumes – 2.5 lakh units per month now, double the year ago figures, are expected to help top the 2.8 million mark in FY10.
| DEMAND PUSH | |||
| in Rs crore | FY09 | FY10E | FY11E |
| Vehicle sales (million) | 2.19 | 2.82 | 3.36 |
| % change y-o-y | -10.5 | 28.8 | 19.1 |
| Net sales | 8,436 | 11,522 | 13,442 |
| % change y-o-y | -2.6 | 36.6 | 16.7 |
| OPM (%) | 13.3 | 20.7 | 18.0 |
| Net profit | 861 | 1,762 | 1,797 |
| P/E (x) | 28.9 | 14.2 | 13.9 |
| Source: M F Global; E: Analyst estimates | |||
Branding strategy pays off
Thanks to its twin-brand focus, the company has been able to improve its market share from 22 per cent in 2008-09 to about 27 per cent in December 2009 quarter. The company will position the Discover and the Pulsar in the commuter and the premium segments, respectively. The price points for Discover will be in the Rs 35,000 to Rs 55,000 (100, 125 cc) while that for Pulsar will be in the Rs 51,000 to Rs 75,000 (135, 180 and 220 cc) ranges. With the plan of phasing out of the XCD brand due to poor sales, the company will be left with Platina at the entry level, Discover and Pulsar.
Operational leverage due to the higher volumes helped Bajaj increase revenues by 55 per cent year-on-year to Rs 3,331 crore and 14.5 per cent sequentially in the December 2009 quarter. Though raw material costs as a percentage of net operating income went up 230 basis points sequentially, the company was able to maintain operating profit margins at 22 per cent for the second quarter in a row due to higher volumes. Realisations were, however, down sequentially because the product mix was skewed more towards the Discover and the rupee appreciated by 4 per cent in the quarter.
Going ahead, rising raw material prices will mean that the current margins (22 per cent) are likely to slip into the 18-20 per cent range. Rising costs have forced the company to raise prices of Discover by Rs 1,000 a unit and Platina by Rs 500.
The Street has reacted positively to the improvement in volumes, revenues and margins over the last two quarters pushing up the stock price by 74 per cent since June 2009. At Rs 1,726, the stock is trading at 14 times its 2010-11 earnings and considering that most of the operational gains are reflecting in it, there is little room for further upsides.