Bajaj: Pulsating growth

Cost cutting has led to higher operating margins for Bajaj

Bajaj Auto has posted excellent numbers for the December quarter with revenues up a smart 25 per cent y-o-y at Rs 2,001 crore and operating margins expanding by 300 basis points to 17.9 per cent.

Sequentially too, operating margins are up by 100 basis points. The stock closed up a per cent at Rs 2013 on Friday in an otherwise flat market.

However, volume growth appears to be slowing down: while in the September quarter it was 29 per cent y-o-y the growth for nine months till December 2005 has been 24 per cent y-o-y.

Given that volumes in the quarter were up by 16 per cent y-o-y, the company has obviously managed decent realisations, a reflection on its pricing power.

Earnings before interest, depreciation and tax (EBITDA) at Rs 358.2 crore are up a smart 48 per cent y-o-y, primarily because the company has managed to control costs: raw materials to sales were down 150 basis points at 69.85per cent, y-o-y.

In fact, Bajaj Auto has succeeded in keeping overall costs in check with total expenditure to sales down by nearly 300 basis points which indicates that economies of scale are kicking in.

At the net profit level, there has been a stunning rise of 53 per cent to Rs 279 crore and only some of this is due to an increase in the other income of about 22 per cent. At Rs 2,013, the stock trades at around 18 times estimated FY07 earnings.

Bajaj Auto is the market leader in the entry and premium segments. The company has a stake in the insurance joint venture with Allianz, which is now the number two player in the private sector.

Thus, with sales momentum in the two-wheeler segment expected to sustain, the company should continue to do well though competitive pressures might put pressure on margins.

GAIL India: Under pressure

GAIL India has seen its overall operating profit margin shrink almost 900 basis points y-o-y to 23.3 per cent in the December quarter.

Reduced profitability of GAIL is owing to a number of factors "" segment profit margin of the petrochemical division shrank almost 900 basis points to 37.31 per cent in Q3 FY06.

In addition, the natural gas trading division has reported a segment loss of Rs 62.4 crore compared with a segment profit of Rs 80.6 crore in the Q3 FY04.

The segment profit margin of the LPG and liquid hydrocarbon division fell 242 basis points to 34.61 per cent in Q3 FY06.

The company's petrochemical division saw sales expand 9 per cent y-o-y to 75,000 tonne in the last quarter.

Analysts, however, highlight that the company could not fully pass on the higher costs of inputs such as propane and butane to its customers, resulting in falling margins for this business.

Meanwhile, profitability of the LPG and liquid hydrocarbon division was affected by several factors. For instance, the company's LPG transmission fell 10 per cent y-o-y in the last quarter to 5.43 lakh tonne owing to reduced supplies from RIL's Jamnagar refinery.

Various units of RIL's Jamnagar refinery were shut for almost 50 days in the last quarter owing to planned maintenance.

Also, reduced availability of gas from upstream players resulted in the company's LPG production dropping 5 per cent to 2.69 lakh tonne in the last quarter.

A small cushion for the company's margins was provided by its natural gas transmission division, which saw a volume growth of 11 per cent in Q3, which helped segment profit margin of this business expand 1,166 basis points to 75.75 per cent.

However, this business contributes only about 13.65 per cent to the company's total sales. Also, the company's subsidy burden fell 39.1 per cent y-o-y to Rs 526 crore in the last quarter.

Nevertheless, the company's operating profit fell 11 per cent to Rs 911.06 crore in the last quarter. The stock appears reasonably valued at about 10.5 times estimated FY06 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur