Bajaj Auto Ltd Scoring on investments

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1 Bajaj Auto Ltd Scoring on investments BSE Code NSE Code BAJAJAUTO Bloomberg Code Face Value 10 CMP Rs 850 Market Cap Rs 86000mn Share Holding Pattern 1% 24% 29% Promoters/ associates NRI/OCB/Banks Share Price Chart 46% FII/PFI/MF/GDR Others Company Background Bajaj Auto Ltd (BAL) is the second largest two-wheeler maker in India. It was established in 1945, as a trading company and obtained a production license in It initially struck a technical collaboration with Piaggio of Italy but later started selling products under the Bajaj brand name. Business BAL s product range includes Scooters (geared and ungeared), motorcycles, Stepthroughs, three-wheelers and spare parts. BAL has undergone a change from being a predominant player in scooters till to becoming the second biggest manufacturer in motorcycles that also produces scooters. Table 1: BAL volumes Sales volumes Growth (%) Motorcycle 1,023, , Other 2 wheelers 265, ,776 (30.8) Total 2 wheelers 1,288,949 1,251, wheelers 229, , Total 2 & 3 wheelers 1518,131 1,445, Bajaj Auto holdings is fully owned subsidiary of BAL. Other associates include Maharashtra scooters Ltd, where it has a 24% stake, and Bajaj Auto finance Ltd, where it has a 31.3% stake. It has a presence in the insurance sector too with its subsidiary Bajaj Allianz general insurance company Ltd and Allianz Bajaj life insurance company Ltd with a 74% holding in each in a joint venture with Allianz. Industry Scenario The two-wheeler industry thrives in developing countries, especially in the densely populated countries like India. With income levels rising, people are opting for entrylevel motorcycles than scooters. The two-wheeler industry grew by 11.6% to 5.64mn units in from 5.05mn units in The share of motorcycles in total two-wheeler sales continues to improve (76.6% from 74.4% in ) while that of geared scooters continues to be on the decline. Geared scooter volumes degrew 14% in to 288,000 units. This segment is witnessing decling trend since This segment is shrinking in size because of increased affordability of people and narrowed differential between scooters and entry-level motorcycles. July 19,

2 Three wheelers can be broadly categorized in three-seater and six-seater passenger vehicles and goods carriers. This segment is an ideal one as it acts as low cost delivery vehicle and a taxi; therefore a flourishing one in a developing country like India. Exhibit 1: Industry volumes (including exports) scooters/scooterette moped motorcycle/step-throu's FY96 FY97 FY98 FY99 FY2000 FY01 FY02 FY03 FY04 Source: SIAM Exhibit 2: Market share of various players in different segments Mkt share Scooter/Scooterette % 17% 19% 39% Bajaj Auto HMSI TVS Mkt share Motorcycle/Stepthrou's Others 8% 6% 24% BajajAuto 20% Mkt share Scooter/Scooterette % 25% 36% Bajaj Auto HMSI TVS Others Mkt share Motorcycle/Step throu's % 6% 24% BajajAuto 18% Hero Honda TVS 16% Hero Honda TVS Yamaha Yamaha 44% Others 48% Others Mkt share 3-wheelers % 2% Atul Auto 4% Bajaj Auto 9% Bajaj tempo M&M Piaggio vehicles 70% Mkt share 3-wheelers % 16% Atul Auto 5% Bajaj Auto 8% Bajaj tempo M&M 68% Piaggio vehicles Source: SIAM July 19,

3 Highlights of Annual Report Sales driven by better product mix and higher realisations Exhibit 3: Net sales & income from operations Rs mn Growth (%) 0 FY01 FY02 FY03 FY04 (5.0) Source: Company The high growth in was due to huge motorcycle volumes, which overtook BAL s scooter volumes. Sales grew at a CAGR of 12% between FY01 to FY04. Net sales and income from captive wind power plant in stood at Rs48bn, registering a growth of 14.3% from Rs42bn in Sales growth has been driven by high volume growth in motorcycles and three-wheelers and thrust on exports. Domestic two-wheeler volumes for BAL remained flat at 1198,700 units in compared to 1,198,489 units in due to a huge fall in sales of scooters. Motorcycles and three-wheelers increased 22% and 25% in value terms respectively. Exports are playing an important role and adding to topline growth too. In exports, BAL sold 82,314 motorcycles registering a 90% yoy growth. Three-wheeler sales stood at 65,797 units in , a growth of 61% over the previous year. Table 2 Volumes Growth (%) Motorcycles 1,023, , Three-wheelers 229, , Exports 156,007 94, July 19,

4 Raw material prices put pressure on margins Exhibit 4: Operating profits and OPM trends Rs mn FY01 FY02 FY03 FY OPM % The rising trend in operating profit margins (OPM) was reversed in FY04. OPM declined 200 basis points to 15% in from 17% in This was mainly due to the continuous rise in steel prices, which lead to the share of materials to increase to 66.9% as a percentage of net sales in from 64.3% in The company, however, was able to partially offset this high raw material cost by saving on other costs. Rationalisation of manpower and increased productivity led to labour cost as a percentage of net sales and revenue from captive power plant income, to go down to 5% in from 5.7% in The company paid Rs235mn as compensation under its voluntary retirement scheme in It reduced the number of employees to 11,531 in from 12,338 in Table 3 Year Production No. of employees Output/ employee/ year ,439,174 21, ,354,482 18, ,381,765 18, ,432,471 17, ,212,748 13, ,356,463 13, ,457,066 12, ,516,876 11, Source: Company July 19,

5 Huge contributions by Other income Other income increased by 65% in to Rs4.9bn from Rs3bn in Other income formed 48% of the Profit before tax (PBT). Other income (post tax) alone accounts for an EPS of more than Rs30. The rise in other income was mainly due to major gains on account of dividends, interest and income from mutual fund units. Dividends increased 105% to Rs261mn and income from mutual fund units increased to Rs579mn in from Rs44mn in Interest on various bonds and debentures remains the largest contributor to other income and stood at Rs1,451mn in up from Rs1,258mn in Negligible Debt The company paid all its secured loans, which stood at Rs539mn in Its unsecured loans increased due to sales tax deferral liability/loan. Unsecured fixed deposits too have been paid off to some extent and were Rs27mn as of The company had negligible interest cost at Rs9mn in and its debt/total equity is Huge Investments in Balance sheet The company has huge investments in its balance sheet to the tune of Rs39bn (at cost). Cash per share stands to around Rs208 per equity share (Cash & Bank and quoted government securities are considered for calculating cash per share). BAL has significant investment portfolios in the balance sheet. Investments in the balance sheet were valued (at cost) at Rs39bn (including technical know-how of Rs77mn) in This is compared to fixed assets of Rs12.3bn and net sales of Rs47bn. The company in 2003 spoke about hiving off the investment portfolio into a separate business. The Director s report is silent on this issue. The huge reserves in the balance sheet are lowering the company s RONW and ROE. Investments in government securities and other low yielding securities are lowering its profitability ratios. July 19,

6 Increased Research & Development Table Capital* (Rs mn) Recurring (Rs mn) R&D as % of sales ** 1.4% 1.0% * Including technical know-how ** Net of excise duty The company s R&D was mainly focussed on upgrading current products, developing new scooters and cost reduction mainly in the entry level segments. The company is setting up a new facility at Akurdi complex for design, analysis, prototyping and testing. Capex & Acquisitions The company spent around Rs3bn over three years for its wind power plant, which generated 109mn units of power in No new investments were made in on this plant. BAL will be acquiring 27% of Maharashtra scooters from Western Maharashtra Development Corporation Ltd. Currently, its has a 24% holding in the company. No Capacity constraints The company has added capacity to its Chakan plant. The capacity at this plant stands at 600,000 units in from 480,000 units in However, it has reduced capacity at its Akurdi plant, which mainly manufactured scooters to 720,000 units in from 840,000 units in due to declining demand for geared scooters. The capacity for the company stands at 2,520,000 units - same as it as in This means that the capacity utilisation is only 60% of the total production capacity and the company will not have a supply constraint when its new range of scooters and its new bike K60 are launched. Negative working capital Even with an increase of 14% in net sales and other income from operations to Rs48bn in , the company enjoyed a negative net working capital. Debtor days and inventory days reduced to 10.2 and 15.5 days respectively in from 14.6 and 18.1 days respectively in Creditor days increased to 51.3 days in from 39.6 days in Cash & Bank increased 164% over 2003 levels to Rs794mn in The company was successful in reducing debtor levels by 20% in July 19,

7 Outlook and Future strategy Rural development, good monsoons should witness a healthy growth in Increased exemption on personal tax in the budget will increase demand for two-wheelers. The main competition in the motorcycle market will be in the executive segment. Although BAL has a presence in this market with brands like Caliber and Wind, it only has a 11% market share in this segment. It will introduce Discover in Q2 FY05 to gain a hold in this segment. BAL is developing a series of new scooters to revive this segment which has been degrowing for a few years now. The company is focussing on exports to counter the vagaries of the domestic market. It is looking to consolidate in markets like Sri Lanka, Bangladesh and Columbia where it is the leader, increase presence in Egypt, Peru, Iran among a few and entering new markets in Africa and South East Asia. July 19,

8 Income Statement Period to FY02 FY03 FY04 (Rs mn) (12) (12) (12) Net Sales 36,212 41,892 47,816 Operating expenses (31,063) (34,788) (40,640) Operating profit 5,149 7,105 7,176 Other income 2,560 2,965 4,887 PBIDT 7,708 10,070 12,063 Interest (34) (11) (9) Depreciation (1,797) (1,712) (1,799) Profit before tax (PBT) 5,878 8,347 10,255 Tax (1,837) (2,502) (2,191) Profit after tax (PAT) 4,041 5,845 8,064 Extraordinary / prior period items 1,141 (499) (680) Adjusted profit after tax (APAT) 5, ,384 YOY (%) Balance Sheet Period to FY02 FY03 FY04 (Rs mn) (12) (12) (12) Sources Share Capital 1,012 1,012 1,012 Reserves 27,646 31,394 35,924 Net Worth 28,658 32,406 36,936 Loan Funds 6,261 8,402 10,057 Def Tax liability 2,361 2,405 2,390 Total 37,279 43,213 49,384 Uses Gross Block 25,536 26,397 27,205 Accd Depreciation (11,893) (13,455) (14,967) Net Block 13,643 12,942 12,238 Capital WIP Total Fixed Assets 13,683 12,982 12,321 Investments 19,789 27,406 38,631 Total Current Assets 19,898 21,551 20,530 Total Current Liabilities (16,545) (19,407) (23,261) Net Working Capital 3,353 2,144 (2,730) Def Tax assets ,162 Total 37,279 43,213 49,384 July 19,

9 Cash Flow Statement Year to (Rs mn) 03/02 03/03 03/04 Net profit before tax and extraordinary items 5,878 8,347 10,255 Depreciation 1,797 1,712 1,799 Interest expense Interest income 866 1,258 1,451 Dividend income Operating profit before working capital changes 6,250 8,684 10,350 Add: changes in working capital (Inc)/Dec in (Inc)/dec in sundry debtors (Inc)/dec in inventories (inc)/dec in other current assets Inc/(dec) in sundry creditors ,177 Inc/(dec) in other current liabilities 1,928 2,862 1,677 Net change in working capital 1,785 2,843 4,378 Cash from operating activities 8,035 11,527 14,729 Less: Income tax 1,837 2,502 2,191 Inc/Dec in Def Tax Asset/liability 1, Net cash from operating activities 8,104 8,843 12,042 Extraordinary inc/(exp) 1, Cash Profit 9,245 8,345 11,362 Cash flows from investing activities (Inc)/Dec in fixed assets 1,856 1,011 1,137 (Inc)/Dec in Investments 7,783 7,617 11,225 Interest received 866 1,258 1,451 Dividends received Net cash from investing activities 8,181 7,242 10,650 Cash flows from financing activities Inc/(Dec) in debt 1,124 2,141 1,655 Direct add/(red) to reserves Interest expense Dividends 1,417 1,598 2,854 (inc)/dec in loans & advances 774 1, Net cash used in financing activities 1,025 1, Net increase in cash and cash equivalents Cash at start of the year Cash at end of the year July 19,

10 Sales - Value wise break up (Rs mn) Sales value (Rs mn) Motorcycles 26,082 31,852 Scooters geared 5,261 3,653 Scooters ungeared 1,254 1,040 Step thru s Three wheelers 11,542 14,427 Spare parts 2,324 2,640 Sales - percentage break up Sales break up % (value) Sales break up % (volumes) Motorcycles Scooters geared Scooters ungeared Step thru s Three wheelers Spare parts Unit realisation Unit Realisation (Rupees) Motorcycles 30,044 31,119 Scooters geared 19,583 20,501 Scooters ungeared 20,640 19,010 Step thru s 18,045 17,630 Three wheelers 59,538 62,950 Raw material break up RM consumption (Rs mn) RM break up (%) Ferrous metal non-ferrous metal 1,018 1, tyres & tubes 1,072 1, Other components 22,868 27, Others Total 26,339 30, RM consumption including components (Rs mn) Break up (%) Imported including all charges 1, Indigenous 25,153 29, Total 26,339 30, July 19,

11 Ratios FY01 FY02 FY03 FY04 (12) (12) (12) (12) Per share ratios EPS (Rs) Div per share Book value per share Valuation ratios P/E P/BV EV/sales EV/ PBIT EV/PBIDT Profitability ratios OPM (%) PAT % ROCE RONW Liquidity ratios Current ratio Debtors days Inventory days Creditors days Leverage ratios Debt / Total equity Component ratios Raw material Staff cost Other expenditure Payout ratios Dividend Payout Ratio Analyst Meet - ( Results Q4 FY04 - ( Published in July India Infoline Ltd India Infoline Ltd. All rights reserved.regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai Tel.: +(91 22) Fax: This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report. July 19,