Result Snapshot

Bajaj Auto’s Q1 FY08 results surpassed our expectations. Net sales were down only by 4%, to Rs 2.1 billion, despite a 12% yoy deceleration in volumes. Contribution per vehicle slightly improved (increasing by 2.2% yoy) despite material cost (as percent of sales) being up by 178bp yoy as 3-wheeler exports formed a greater proportion of sales. The margin, at 13%, was in line with our expectations. PAT was down by 18% to Rs 2.26 billion against our expectations of Rs 2.06 billion. The stock trades at 12.4x FY09 EPS of Rs 177. With the clarity surrounding the success of its new bike yet to materialise, we maintain a MARKET PERFORMER.

Result highlights

Bajaj Auto’s Q1FY08 results surpassed our expectations. Net sales were down by only 4% to Rs 2.1 billion despite a 12% yoy slide in volumes. This was partially helped by excise relief at the Uttaranchal plant. Contribution per vehicle marginally improved despite the fact that material cost (as a percent of sales) was up by 178bp yoy, as 3-wheeler exports formed a greater proportion of sales. Contribution per vehicle increased by 2.2% yoy. Margins, at 13%, were in line with our expectations. PAT was down by 18% to Rs 2.26 billion against our expectations of Rs 2.06 billion, helped by lower excise duty. The effective tax rate has remained at the 31% levels. This indicates that the company is not making profits on Platina after passing on a Rs 3,000 discount per bike. In other words, the company has not been able to avail of the income tax benefits from Uttaranchal as yet. This has been the lowest-margin quarter for the company for a long time, which means that BAL has started to feel the pressure of cutthroat competition prevalent in the industry. To provide some margin relief, the company has raised prices on its Platina and Discover by Rs 500 wef 1st July.

Lowest-ever margins

The company had reduced the price of its Platina by Rs 3,000 last quarter, soon after production was shifted to Uttaranchal, thereby passing on the excise benefits to customers. Pricing pressure coupled with rising raw material cost has dealt a double blow, with the company reporting, at 13.1%, its lowest-ever margins in the recent past.

Estimates maintained

With the uncertainty surrounding the success of its new bike in the entry-level segment, we have maintained our estimates. We expect BAL to post a 16.8% growth in its top line at Rs 111 billion in FY08. However, PAT is expected to rise by only 9% yoy to Rs 14 billion.

Our View

We believe that BAL would be able to sell about 1.1 million 2-wheelers in H1 FY08 while it would end the year with sales volumes of about 2.7 million. Also, if the new 2-wheeler proves a success in the likes of Pulsar, BAL would make a major breakthrough in the entry-level 100-cc segment where Hero Honda has a 90% share. However, although we believe that the new bike might provide a positive surprise, we have not included any major contribution from it in our estimates. The stock trades at 12.4x FY09E EPS of Rs 177. With the clarity surrounding the success of its new bike yet to materialise, we maintain a MARKET PERFORMER rating. We continue to represent our forecast according to the old BAL structure. We shall introduce financial figures after the balance-sheet division is complete.