While a slew of new launches should enable Bajaj Auto to achieve volume and revenue growth of 18-20 per cent for 2011-12, margins are likely to fall a tad on rising commodity costs.
Riding on a 17 per cent increase in volumes for the March quarter and a better product mix, Bajaj Auto reported a 25 per cent year-on-year increase in revenues. Adjusted net profits which were up 20 per cent to Rs 675 crore, in line with expectations. What differentiate India’s number-two player in the two-wheeler space, have been its margins that were at 20.5 per cent. Bajaj Auto has been able to hang on to 20 per cent plus margins due to increased sales of its higher end models such as Pulsar as well as three-wheelers/commercial vehicles.
Despite record volumes for market leader Hero Honda, competitive pressures, higher raw material costs and a lower margin sub-125 cc focus has seen the company’s margins for 2010-11 decline to about 13 per cent. Analysts believe though Ebitda margins for Bajaj Auto will fall slightly due to raw material costs, the company should be able to grow its revenues as well as net profit for 2011-12 by about 20 per cent each. Given the cash on the balance sheet and the strong growth prospects, analysts have pegged a one-year target in the region of Rs 1600-Rs 1,650, which from the current levels should deliver 25 per cent returns. A key risk is the withdrawl of export benefits which will impact the bottom line to the tune of 10 per cent, believe analysts.
| STRONG VOLUMES, STEADY MARGINS | |||
| In Rs crore | Q4FY11 | FY11 | FY12E |
| Volumes in lakh | 9.48 | 38.23 | 45 |
| % change | 17 | 38 | 18 |
| Turnover | 4,301 | 16,975 | 20,370 |
| % change | 25 | 41 | 20 |
| Ebitda | 882 | 3,463 | 3,995 |
| % change | 13 | 34 | 13 |
| Ebitda (%) | 20.5 | 20.4 | 19.6 |
| % change in bps | -200 | -120 | -80 |
| Adjusted net profit | 675 | 2,615 | 3,100 |
| % change | 20 | 53 | 19 |
| Source: Company, Analyst estimates % change is year-on-year | |||
GAINING SHARE
The two-wheeler segment, which accounts for more than 85 per cent of Bajaj Auto’s volumes, recorded a 35 per cent growth in 2010-11. The company’s volumes in the domestic market grew by 36 per cent, as against the industry’s 23 per cent, while exports were up 34 per cent. This helped the company gain a 2.4 per cent share in the domestic motorcycle market.
The company continues to bank on its twin-brand strategy of the Discover in the commuter segment and the Pulsar in the premium segment, with the former accounting for nearly 30 per cent of motorcycle sales. The Discover is estimated to have edged out Hero Honda’s Passion range to become the number-two brand.
NEW LAUNCHES TO BOOST VOLUMES
The company has been introducing new bikes, the latest being the Discover 125, launched towards the end of March, grossing sales of 20,000 units in April. The company’s overall sales in April were up 17 per cent on the back of a good showing in three-wheelers and motorcycles. Exports jumped 39 per cent to 158,000 units, including about 32,000 units in transit. Going ahead, the company is likely to launch new versions of the Pulsar and Discover towards the end of the financial year.
It plans to launch the Boxer 150cc, as well as a slew of premium and sports bikes from the Kawasaki and KTM stables, during the year. Given these launches and the fact that the company will fully realise the gains from the recently-launched Discover in the current financial year, analysts expect it to hit a volume growth of 18-19 per cent for 2011-12. Though the macroeconomic outlook for the auto space is negative due to an increase in interest rates, rise in operating expenses and a jump in commodity costs, analysts believe the two-wheeler space will be least affected by this. The sector, on a high base, is likely to record a sales growth in the region of 13-15 per cent for 2011-12.
MAINTAINING MARGINS
While raw material to sales ratio at 74-75 per cent is similar for both Bajaj Auto and Hero Honda, Bajaj Auto’s margins and realisations due to its focus on top-end models are higher than its bigger competitor. Thus, while Bajaj Auto’s realisations for 2010-11 are in the region of Rs 42,700, Hero Honda’s are at Rs 36,000 despite the benefit of higher volumes. A better product mix has helped Bajaj Auto achieve Ebitda margins in the 20 per cent range to Hero Honda’s 13 per cent. Going ahead, analysts believe that though the company took a price increase in April, it is likely to record a margin fall of about 70-80 bps due to higher commodity costs, as well as higher proportion of two-wheeler sales vis-a-vis the more profitable three-wheelers.
