Bajaj Auto: Cruising along

Half-a-dozen rollouts and upgrades, lined up this year, will boost Bajaj fortunes

With a 300 basis points increase in its market share of motorcycles, to 31 per cent, Bajaj Auto has had a great FY06. At 32 per cent y-o-y, the rise in motorcycles volumes has been well above the industry average of 19 per cent.

That drove the overall sales for the company, up 27 per cent y-o-y to Rs 8103.7 crore. With Bajaj selling a larger number of motorcycles in the value and premium segments and also increasing exports, operating profit was up a smart 47 per cent and operating profit margin rose 70 basis points to nearly 22 per cent.

The Q4 numbers were particularly good, thanks to the popularity of the 110cc Discover DTSi, launched in December 2005, of which the company sold 113,000 units.

The 49 per cent rise in operating profit on a y-o-y revenue growth of 32.5 per cent was also the result of better exports, which were up 23 per cent.

The company has been gaining share at the expense of Hero Honda which managed to grow volumes by just under 13 per cent in the March quarter, compared with Bajaj's 25 per cent, albeit on a higher base.

Bajaj's general insurance venture has done well in FY06, retaining its number two position in the private sector and writing a premium of Rs 1,284 crore, an increase of 50 per cent y-o-y.

The life insurance venture became the top player among private sector companies with a gross written premium of Rs 3,100 crore, an increase of 213 per cent.

With half-a-dozen launches and upgrades lined up this year, including a couple of new scooters and an upgrade for the Pulsar, the company is prepared to cash in on the buoyant demand.

The management is confident of being able to absorb raw material costs and does not believe that it would need to drop prices to fight competition.

Exports, which are only going to increase in the future, will earn better margins than domestic sales. At Rs 2,950, the stock trades at an attractive 17 times estimated FY07 earnings, even without taking into account the insurance business and surplus cash.

Bongaigaon: Margin pressure

The key takeaway from Bongaigaon Refinery and Petrochemical's (BRPL) March 2006 quarter results is that a higher subsidy burden coupled with lower gross refining margins have eaten into operating margins.

Operating profit has fallen 22.55 per cent y-o-y to Rs 47.21 crore in the last quarter, despite net sales improving 20.6 per cent to Rs 1473.08 crore. Gross refining margins were at $3.2 a barrel in Q4 FY06 compared with $4.7 a barrel a year earlier.

In addition, BRPL's subsidy burden amounted to Rs 32.07 crore in the March 2006 quarter compared with nil a year earlier. As a result, operating profit margin fell 179 basis points y-o-y to 3.2 per cent in the March 2006 quarter.

The company board had earlier given an in-principle agreement for amalgamation of the company with IOC. The stock appears reasonably valued at about 6.8 times trailing earnings.

Market rally: Twist in the tale

On May 11, the Sensex touched a new high of 12671 points and things were looking quite rosy in spite of the US Federal Reserve hiking interest rates by 0.25 per cent to 5 per cent two days earlier.

But within about a week, the tables have turned with the market falling 14.77 per cent from its high. With Friday's closing of 10,938 points, the Sensex is back to its March levels.

If FIIs were net sellers of Rs 3676 crore between May 11 and May 18, local funds did buy shares worth Rs 2,372 crore. So, net outflows from institutions of Rs 1,300 crore do not justify such a steep fall.

Even a correction in metal prices can only have limited impact in a normal market. But in a weak market, small reasons precipitate declines and margin calls push them down further.

What has changed is the outlook of investors. With signs of hardening interest rates going forward, equities may not be as attractive to global investors.

If the India story was strong with expectations that our markets could withstand an emerging market sell-off, then that is not true, at least at prevailing valuations.

With trailing Sensex P/Es of 21-22, valuations may not have been at the April 2000 level of 34, but they were still high. On Friday, the Sensex P/E multiple came down to 19.4.

The saving grace is that the business environment and corporate earnings are still fine so far, and the economy could handle a little interest rate hike. But the sound bites from the Left Front are a source of worry.

A correction in a market that has gone up one-way for over six months can also be termed healthy, except for those investors, who invested substantially in the past two months.

For investors, it has been an expensive lesson to learn that markets do not go up all the time, and that they need to temper expectations.

With contributions from Shobhana Subramanian and Amriteshwar Mathur