BAJAJ AUTO LIMITED : AS SMOOTH A RIDE AS EVER
Two-wheeler OEMs are predicted to have strong credit profiles characterised by healthy return on capital employed (ROCE) and sustainable balance-sheets with negligible debt and strong cash and liquid investments. Among them, Bajaj Auto Limited continues to occupy a strong position, unmoved by any challenges
Bajaj Auto Limited is the flagship of the companies under the aegis of the Bajaj Group. The group comprises 34 companies and was founded in the year 1926. Bajaj Group is amongst the top 10 business houses in India and has expanded its footprint over a wide range of industries including automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance. Bajaj Auto is ranked as the world’s fourth-largest three and two-wheeler manufacturer and the brand is popular across several countries in Latin America, Africa, the Middle East, South and Southeast Asia.
The characteristics of the Bajaj Group include integrity, dedication, resourcefulness and determination to succeed which can be traced back to the days of the initiation of the company and its relentless devotion to a common cause. Under the leadership of the present chairman and team of Bajaj Auto, since 1965 the turnover of the flagship company has gone from Rs 7.2 crore to Rs 12,000 crore. Along with this the product portfolio has also expanded and the brand has found a global market. The legacy of Bajaj Auto rickshaws has been reaching great heights and has displayed unparalleled market dominance across any automobile segment. In 2007, Bajaj Auto acquired a 14% stake in KTM AG of Austria that has since grown to 48% and holds the same through its subsidiary Bajaj Auto International Holdings BV Netherlands. This catalysed Bajaj Auto’s endeavour to democratize motorcycle racing in India. Today, Bajaj Auto is an exclusive manufacturer of the Duke range of KTM bikes and exports them worldwide. In 2018, KTM was the fastest growing motorcycle brand in the country.
Bajaj Auto is also successful in leading the pioneering introduction of India’s first ever quadricycle – Qute. The company exports to 70+ countries and a significant share of revenues come from exports. This stands in line with the new brand image – The World’s Favourite Indian. Bajaj Auto is the first Indian two-wheeler manufacturer to deliver four-stroke commuter motorcycles with sport performance in the Indian market. It has been able to achieve this with the 150 cc and 180 cc Pulsar. Motorcycles produced by Bajaj Auto include Platina, Discover, Pulsar, Avenger, Dominar 400 and CT 100.
Its manufacturing facilities are located at Chakan near Pune and at Pant Nagar in Uttarakhand. In the fiscal year 2018-19 the company recorded landmark sales of over five million vehicles, clocking the highest ever turnover of Rs 31,899 crore and consolidated profit after tax of Rs 4,928 crore. Bagging the honour of being India’s largest exporter of motorcycles, three-wheelers and quadricycles, it exported over 2 million unit sales to 79 countries in 2018-2019.
Sector Overview
The two-wheeler industry in India has accelerated since the announcement of the process of liberalisation in 1991. Previously, there were very few two-wheeler models available in the country. Currently, India is the second-largest producer of two-wheelers in India, next to China and Japan in terms of numbers of two-wheelers produced. The desire of owning two-wheelers can be traced to a variety of facts which are peculiar to India. One of the factors that can be identified is the poor public transport in many parts of India. The recent trend in the two-wheeler market is the introduction of electrically operated vehicles from a range of manufacturers such as Indus and Hero. Besides, these electrically operated vehicles can be recharged from convenient household electrical points. The only identified disadvantage in these electric vehicles is the speed which is restricted to around 25 miles per hour.
Coming to the performance of the two-wheeler market in 2020, the production of domestic automobiles increased at 2.36 per cent CAGR between FY16-20 having recorded 26.36 million vehicles manufactured in the country in FY20. The export of automobiles reached 4.77 million vehicles in FY20, growing at a CAGR of 6.94 per cent during FY16 - FY20. Two-wheelers made up 73.9 per cent of the vehicles exported, followed by passenger vehicles at 14.2 per cent and then three-wheelers at 10.5 per cent and commercial vehicles at 1.3 per cent.
The long-term growth trail of the two-wheeler industry remains the same and this industry has significant potential considering that the overall penetration levels are only half to one-third of the level in other ASEAN countries. The Indian automobile sector is drawing a close parallel with the recovery trend of China as we come out of the lockdown and restrictions. Automotive manufacturers saw almost nil sales in April following the stringent restrictions and almost all of them recorded 80-90 per cent dip in domestic sales in May. Now, several automobile makers have invested heavily in various segments of the industry during the last few months in order to keep up with the demand.
According to the data released by the Department for Promotion of Industry and Internal Trade (DPIIT), the automobile industry attracted foreign direct investment (FDI) worth USD 24.53 billion between April 2000 and June 2020. We can say that two-wheelers are not only consumption goods but also generate income as they are capable of creating their own demand and also feed a virtuous cycle. There are some factors which are capable of keeping the demand for two-wheelers floating which can be the rise in urbanisation, increasing numbers of women in the workforce and an affordable product. A growing demand will fuel the sale of two-wheelers not just in the entry and executive segments but also will support demand for scooters and the premium segment.
Financial Performance
Coming back to Bajaj Auto and taking into account their financial and operational performance, let’s take a look at the consolidated quarterly performance. The net sales increased to Rs 8,909.88 crore in Q3FY21 as compared to Rs 7,639.66 crore in Q3FY20. The operating profit increased by 21.03 per cent from Rs 1,733.33 crore in Q3FY20 to Rs 2,097.84 crore in Q3FY21. The net profit of Q3FY21 was recorded at Rs 1,555.30 crore as compared to Rs 1,261.50 in the same quarter in the previous year – a jump of 23.29 per cent. On an annual basis, the net sales were seen declining by 1.45 per cent from Rs 30,357.63 crore in FY19 to Rs 29,918.65 crore in FY20.
The operating profit was seen inching up by 1.32 per cent in FY19 as compared to FY20. The net profit was reported 6.83 per cent higher in FY20 at Rs 4,890.40 crore as compared to Rs 4,577.85 crore in FY19. The return on assets (ROA) is recorded at 19.56 per cent which is greater than 18.26 per cent compared to the previous fiscal year. The return on equity (ROE) was also improved in FY20 as compared to FY19. As on September 30, 2020, surplus cash and cash equivalents stood at Rs 16,240 crore as against Rs 14,322 crore as on March 31, 2020.
Let’s have a look at the quarterly and half yearly volumes for Bajaj Auto pertaining to two-wheelers and commercial vehicles’ segment. It can be observed that the share in domestic motorcycle market was 18.2 per cent in the first H1FY21 as against 18.1 per cent in H1FY20. In Q2FY21 Bajaj Auto sold over 3,48,000 units in the domestic and export markets, which can be recorded as the highest ever. Also, KTM and Husqvarna sold over 20,200 units in the domestic market, which can be seen as the highest ever. Bajaj Auto continues its leadership in the domestic market for commercial vehicles with overall share of 51 per cent.
Domestic CV volumes choose to remain muted and will depend on return of adequate short distance mobility demand. Within the CV segment, cargo vehicles have fared better than passenger vehicles and also the company’s share has increased to 37 per cent which is the highest ever. September 2020 emerged to be the highest ever month to record export of 2,12,000 units. The export revenue in USD was reported to be USD 599 million which in Indian currency was Rs 4,614 crore. Now, exports contribute 46 per cent of sales. As on September 30, 2020, surplus cash and cash equivalents stood at Rs 16,240 crore as against Rs 14,322 crore as on March 31. 2020.
Conclusion
The first half of FY21 was impacted by the pandemic which led a reduction in GDP as well as created employment uncertainties and supply chain disruptions. All this took a significant time to reverse the damage. In such a challenging and dynamic environment, the company delivered a reasonably good performance across all business verticals on the basis of pent-up demand and the festive period. A slew of measures were implemented for the entire business ecosystem, helping the end-customers, dealers, vendors and employees wade through this crisis. Timely payments were made to all the business partners, including vendors and facilitation with bankers for vendors to avail credit facilities.
Also, the employees were paid their salary for the entire period. Two-wheeler OEMs are predicted to have strong credit profiles characterised by healthy return on capital employed (ROCE) and sustainable balance-sheets with negligible debt and strong cash and liquid investments. In the urban markets, a preference towards personal mobility could boost near-term two-wheeler demand. Also, an increase in rural income would help to boost motorcycle demand with affordability and increasing penetration through targeted product launches. Considering the efforts of the company to overcome any challenges posed hereafter and emerging stronger along with a growing financial performance, we recommend BUY for this stock.