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Bajaj Auto Equity Research

HomeCompanyBajaj Auto Equity Research

Date of Research – 12 January 2016

Price – Rs. 2342.45

About the Company

Bajaj Auto Limited (“Bajaj Auto” or the “Company”) manufactures and sells scooters, motor cycles, three-wheeler vehicles, and automobile spare parts in India and internationally. The Company’s brands include Avenger, Pulsar, Discover, Platina, and Ninja. It also provides commercial goods and passenger carriers.

STRENGTHS

India’s Demographic Advantage

India’s two-wheeler industry will continue to experience increase in demand, for many reasons. Firstly, the country’s aspirational youth and their high disposable income is a significant growth driver. Secondly, growing rural income across India has increased the two-wheeler sales. Finally, poor public transport and an urgent need to avoid urban congestion have increased need for a quicker and more affordable mode of transport.

Well diversified product/market mix Bajaj Auto has a diversified product portfolio including – motorcycles for all segments: Platina (entry), Discover (executive), Pulsar (premium) and Ninja (sport) and sizeable presence in three-wheelers segment. The company derives about one-third of its revenues from the exports.

Flourishing International Business Bajaj Auto is India’s leading exporter of motorcycles and three-wheeler. The company exports to approximately 62 countries and enjoys a leadership position (1st or 2nd) in 20 of them. The company’s iconic brand ‘Discover’ and ‘Pulsar’ have helped the company in strengthening its market share in key markets like Colombia, Central America, Egypt, Sri Lanka and Bangladesh.

Leadership Position in Commercial Vehicles – Three-Wheelers

Bajaj Auto is the world’s largest three-wheeler manufacturer. The domestic three wheeler industry has four major participants namely Bajaj Auto, Piaggio Vehicles, Mahindra and Mahindra and Atul Auto.

The Company has leadership position in three wheelers segment with ~ 54% market share.

CHALLENGES

Stiff Competition in Two-Wheeler Segment Bajaj Auto faces stiff competition from new and existing players. New product launches by Hero MotoCorp, Honda, Yamaha and TVS are expected over the medium term and this could put pressure on the domestic market share of the company. Further, Bajaj Auto does not have any presence in the scooters segment.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 20,041.99 20,158.29 21,614.27 22,687.59 23,088.03 
Expenses 16,396.31 16,003.09 17,501.03 17,908.90 18,668.64  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 3,645.68 4,155.20 4,113.24 4,778.69 4,419.39  
Depreciation 165.01 181.32 267.46 307.16 307.29  
Finance Costs 1.19 0.82 6.49 0.48 1.40  
Other income 797.13 681.81 583.95 824.26 1,222.23  
Exceptional items 340.29 – 
PBT 4,276.61 4,654.87 4,082.95 5,295.31 5,332.93  
Tax 1,228.52 1,390.10 1,271.05 1,732.77 1,508.07  
Extraordinary items 30.37 – 
PAT (before Minority Interest and share of Associates) 3,048.09 3,234.40 2,811.90 3,562.54 3,824.86  
Profit/ (loss) attributable to Minority Interest (0.17) (0.36) (0.01) – 
Share of profit / (loss) of Associates (84.43) (145.52) (213.72) (221.44) (254.62) 
Consolidated Profit / (Loss) for the year 3,132.69 3,380.28 3,025.63 3,783.98 4,079.48  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 18.19 20.61 19.03 21.06 19.14 
Net Profit Margin Ratio 15.21 16.05 13.01 15.70 16.57 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 289.37 289.37 289.37 289.37 289.37
Reserves & Surplus 5,792.35 7,775.93 9,877.89 10,805.95 12,756.05
Net worth (shareholders funds) 6,081.72 8,065.30 10,167.26 11,095.32 13,045.42
Minority Interest 0.17 0.06 0.04 0.04
Long term borrowings 97.48 71.27 57.74 111.77 162.48
Current liabilities 4,664.37 4,165.84 4,730.86 4,476.86 2,953.09
Other long term liabilities and provisions 270.23 258.22 208.66 140.03 77.35
Deferred Tax Liabilities 48.44 115.10 143.18 141.58 188.25
Total Liabilities 11,162.41 12,675.73 15,307.76 15,965.60 16,426.63

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,527.08 2,100.71 2,150.48 2,172.18 2,077.91
Noncurrent Investments 3,376.18 3,347.59 6,158.07 3,184.69 8,444.94
Current assets 5,204.19 6,181.59 5,624.44 9,566.83 4,625.91
Long term advances and other noncurrent assets 581.33 464.18 721.57 511.11 682.26
Deferred Tax Assets 39.03 33.41
Goodwill on consolidation (net) 434.60 548.25 653.20 530.79 595.61
Total assets 11,162.41 12,675.73 15,307.76 15,965.60 16,426.63

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 60.04 44.81 40.64 36.70 36.18
ROE / RONW 50.07 38.84 33.25 27.27 27.31

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 20,041.99 20,158.29 21,614.27 22,687.59 23,088.03 
Growth (%) 2.28 % 0.58 % 7.22 % 4.97 % 1.77 % 
PAT (Rs. Cr.) 3,048.09 3,234.40 2,811.90 3,562.54 3,824.86  
Growth (%) 1.83 % 6.11 % (13.06 %) 26.70 % 7.36 % 
Earnings Per Share – Basic (Rs. ) 108.30 116.80 104.60 130.80 141.00 
Earning Per Share – Diluted (Rs. ) 108.30 116.80 104.60 130.80 141.00 
Price to Earnings 16.57 16.13 22.14 18.40 20.00 

Dividend History

The Company has maintained an average dividend yield of 2.44% over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Bajaj Auto’s average current ratio over the last 5 financial years has been 1.34 times.

Long term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Bajaj Auto’s average long term debt to equity ratio over the last 5 financial years has been 0.01 times which indicates that the Company is operating with a very low level of debt and is well placed to meet its obligations.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Bajaj Auto’s average interest coverage ratio over the last 5 financial years has been 2067.89 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Bajaj Auto reported a promoter holding of 49.30 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 25.89 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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