Bajaj Auto: Shrinking margins

Severe competition in the entry level is costing Bajaj Auto dear

Severe competition in the entry segment, accounting for around 50 per cent of Bajaj Auto's sales, is putting pressure on the company's margins.

That's why despite a strong 30 per cent growth in the topline to Rs 2,400 crore, the operating profit margins slipped nearly 200 basis points y-o-y to 15 per cent in the September quarter.

Higher input costs too played a part but it's the discounts on the Platina, with 100,000 sales in September, that have hit the margins.

Thus, improvement in realisations accounted for just two per cent of the topline growth, with 28 per cent arising out of better volumes. Other income has helped prop up the bottom line.

The company's strategy is to gain share in the motorcycle market and it has been successful: in the last two years, it's share has risen from 24 to 34 per cent.

What's more with the launches of the two versions of Discover""which now clock sales of 60,000 a month compared with 30,000 last year""it has improved share in the executive segment, the stronghold of rival Hero Honda, from 16 to 21 per cent.

In the premium segment, where it is the market leader, the company is planning two more launches of the Pulsar after having launched the Pulsar 180.

It also has plans to launch two new scooters next year. Three-wheelers did well during the quarter growing volumes by 18 per cent y-o-y, maintaining margins given that the company is a near monopoly in the passenger segment. At the current price of Rs 2,790, the stock trades at 21 times estimated FY07 earnings and 17 times estimated FY08 earnings.

The stock may seem expensive given margin pressures. However, given that the company is consolidating its position in the market, it's likely that margins will stablise.

Jet Air: Flying low

Rising costs and falling seat factors resulted in Jet Airways turning in a loss of Rs 55 crore for the September quarter. Had it not been for the higher other income, of which around Rs 160 crore was realised from the sale and leaseback of aircraft, the loss would have been far higher.

In fact, the airline posted a loss of Rs 124 crore at the operating level and the EBITDAR margin crashed to 2.1 per cent from 12.6 per cent in Q2 FY06.

Thanks to increasing capacity (up 44 per cent in H1 FY07) and competition, the airline's seat factor dropped to 63.5 per cent y-o-y. Jet has attempted to maintain yields at the cost of falling loads, which is why the revenue per km remained flat at Rs 4.82.

However, higher personnel costs, commissions, distribution costs and fuel expenses (up 30 per cent y-o-y) pushed the CASK (cost per available seat km) to Rs 3.6 from Rs 3.08 in Q2 FY06. With discounted fares accounting for 65 per cent, the break even level in Q2 FY07 moved up to 74.6 per cent from 63.9 per cent in Q2 FY06.

Jet's market share is around 31 per cent, down 7 per cent y-o-y. The international operations will take time to stabilise with flights on new routes.

With fuel prices having eased and online bookings (10 per cent now) picking up, cost pressures will ease somewhat.

Moreover, the management hopes to maintain yields and improve seat factors in the second half. However, unless capacity addition is delayed, both loads and yields are unlikely to improve significantly.

Jet's performance is unlikely to see any major improvement in the near future and the litigation over the Sahara deal is yet to be resolved. At the current price of Rs 660, the stock trades at around 28-29 times FY08 earnings and appears expensive.