Bajaj Auto: On expected lines

Pricing power in some categories saves the day for 2-wheeler major.

With sales of motorcycles down 13 per cent and three-wheeler volumes up barely one per cent, the street was not expecting much from Bajaj Auto s June quarter numbers. The drop in the top line was restricted to just over 4 per cent at Rs 2,109 crore showing that the company had pricing power in some categories.

However, the fall in the operating profit margin of 330 basis points y-o-y and 110 basis points sequentially to 13 per cent has been extremely disappointing.

The operating profit fell 24 per cent to Rs 275 crore though the fall at the net level was much lower at 15 per cent because the company provided for less tax.

With volumes falling, the higher cost of raw materials has had a greater impact raw materials to sales were up nearly 200 basis points. Also, obviously, the 100cc entry level bikes, which accounted for about half of the company s total bike sales of 4.94 lakh during the quarter, are turning increasingly unprofitable.

They account for barely a fourth of the firm s revenues. The industry as a whole sold fewer entry-level bikes during the quarter though sales of 125 cc bikes were up 15 per cent.

The Bajaj management says it is launching a non-100 cc four-stroke motorcycle later this year and is trying to get customers to upgrade. That should, hopefully help improve margins.

Moreover, with interest rates believed to be peaking, volumes should pick up in the third and fourth quarters. However competitive pressures are unlikely to ease in the near future.

Bajaj Auto s stakes in the general and life insurance firms are being valued at somewhere between Rs 400-600 per share.

The combined value of the core business and the cash work out to Rs 1700. So at the current price of Rs 2195, all the near-term upsides seem to be priced in.



Megasoft: On a new high

The telecom software space has seen significant activity in terms of acquisitions abroad by Indian players. In the past, Patni Computer, Wipro, Sasken and Subex have acquired companies operating in the telecom domain, and now, Megasoft announced that it would acquire the US-based Boston Communications Group, Inc (bcgi).

Unlike most other targets, bcgi is a listed company on the Nasdaq, and Megasoft will be paying $3.60 per share, a 120 per cent premium to its 30-day average closing price.

Megasoft provides software products and services to telecom providers in the areas of authentication and billing, roaming as well as to mobile virtual network operators. bcgi has products in account management and billing, prepaid recharge and also provides services to mobile virtual network operators.

But bcgi has been going through a rough patch it had to settle a lawsuit by paying $55.3 million in cash last year.

Besides, business from its tier-1 carrier customers has been on a decline, it cut its work force by 21 per cent, and it has not declared results since the June 2006 quarter as it is restating its statements on account of stock options.

However, the business synergies seem to be adequate as Megasoft can bring development to India, and cross-sell products. bcgi has strong relations in the US such as Sprint and Cingular, and patents under its belt. While financials are not available, analysts estimate the acquisition cost of $65 million at slightly under one time bcgi s revenues.