The Hindu Business Line : Bajaj Auto: Buy

AN investment can be considered in the stock of Bajaj Auto, especially on weakness linked to the broad markets. The company has managed to report another quarter of improved performance.

A 33 per cent rise in turnover and 28 per cent increase in post-tax earnings appear quite impressive considering the business environment in the two-wheeler industry.

Helped by a 53 per cent rise in motorcycle sales volume, Bajaj Auto reported a turnover of Rs 1,634 crore for the quarter ended June 2005, up 33 per cent from Rs 1,226 crore in the corresponding previous period.

The robust demand for the entry-level motorcycle, CT 100, propelled volumes though this has skewed the product mix towards low-value models.

Over the past few quarters, the contribution of this segment has risen, while that of the executive and premium models has fallen, affecting margin growth.

For the quarter-ended June 2005, the contribution of the premium segment motorcycles dropped to 21 per cent from 25 per cent a year ago.

On the other hand, the robust demand for the CT 100 model pushed up the contribution of entry-level motorcycles to 66 per cent from 53 per cent.

The shift in the product mix, the slowdown in three-wheeler sales, the firm trend in input cost and a lower contribution of `other income' have affected the operating margin.

From 21.8 per cent, it fell marginally to 20.3 per cent for the first quarter of this fiscal. The dent to the margins was, however, mitigated, to some extent, by the modest price hike effected by the company.

With other elements of cost remaining almost unchanged, Bajaj Auto posted a 28 per cent increase in post-tax earnings to Rs 208 crore.

The drop in margins appears to have played a major role in tempering the bottomline growth.

The recent trend of volume-driven growth is likely to get pronounced. The growing competitive pressure in the two-wheeler market can limit the scope for expansion in profitability.

The degree of success enjoyed by model introductions would be the critical performance determinant.

The company has a strong portfolio of products spread across almost the entire spectrum of the two-wheeler market.

The performance of recent launches such as Wave (in the scooter segment) along with Avenger and Discover in the executive segment would play a prominent role in determining the earnings growth.

A pick-up in demand by these launches would also have a positive impact on the product mix and profitability.

To cope with the growing demand, the company is augmenting its production capacity. Also on the anvil is a motorcycle to be launched by January 2006. These factors, along with the steady demand, should help Bajaj grow at a healthy pace.

The key areas of concern are the sustained rise in input costs and the growing competitive pressure.

The prices of key inputs, including steel, have shown no signs of easing while that of crude oil are at historic highs.

Competitors such as LML, Hero Honda and TVS Motor are also slated to launch models this year.

From an investment perspective, Bajaj Auto would rank as a best bet in the two-wheeler industry by virtue of its presence across almost all market segments, strong fundamentals and healthy contribution of `other income'.

The company's huge investment portfolio and its stake in the fast-growing insurance business are other attractive features.

Exposure can be enhanced either on price weakness or on the evidence of a pick-up in demand for latest and proposed model launches.

By the same yardstick, signs of slowdown in motorcycle offtake would warrant dilution of exposure.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page