Stock Review: BAJAJ AUTO

 

BAJAJ Auto's results for the December 2010 quarter reflect the difficult operating environment for the broader sector due to rising input costs, despite a healthy growth in the volume of units sold. Bajaj Auto's operating profit margin fell 170 basis points year-on-year to 20.4% in the third quarter, despite a 26.8% rise in net sales to 4,177.1 crore. The company's realisations per vehicle grew nearly 8.3% compared with a year earlier, but that was not adequate to cover the higher costs of metals and rubberbased inputs. Raw material costs as a percentage of net sales in the quarter rose 260 points compared with a year earlier to 67.6%. However, a 17% rise in units sold and tight control on other costs helped the company grow its net profit 40.4% year-on-year to . 667.1 crore. The quarterly growth in net sales and profit of Bajaj Auto matched ETIG estimates. The stock was up 2% at . 1,319.9 on Wednesday, but it has under-performed the broader market over the past three months. Investors are worried over the rising auto finance rates and commodity input prices.

    Over the next few months, managing the input costs will be the biggest challenge for Bajaj Auto. The management reckons that the prices of raw materials, especially metals, have broadly peaked. Bajaj Auto is also planning to launch variants of its popular models Discover and Pulsar over the next few months, targeted at the higher end of the motorcycle segment. This should boost realisations.

    In addition, the company is expanding its dealer network in rural areas, which are booming; the impact of this move should get reflected in the numbers over the next few quarters. Also, the sale of three-wheelers, which have higher margins, should pick up over the next few months given the strong demand, especially from the overseas markets.

    Bajaj Auto trades at a P/E of 15.4 times on a trailing four quarter basis, while rival Hero Honda trades at 16.5 times. However, the operating profit margins of Bajaj Auto have been superior than its rival's. The current valuations of the two stocks suitably factor in the growth opportunities over the next few quarters.