BAJAJ Auto Finance

Bajaj Auto Finance is likely to post a higher growth in the next fiscal considering a rebound in the two- and three-wheeler market

BAJAJ Auto Finance, the non-banking finance company of the Bajaj Group, has smartly changed its business model over the years. The company was primarily into financing of two-and three-wheelers; as such disbursements formed 60% of total business in FY06. Over the past three years, the company has ventured into personal loans, small business loans and loans for durable goods, as well. As a result, the share of auto loans in the total disbursements slipped to 32% in FY09. Today’ given its lesser dependence on auto market, the company is less exposed to the slowdown in the auto sector than earlier.

In FY08, when the slowdown in the auto market started, the company’s net profit fell by 56% year-on-year. The next year was a mixed-bag. The two-wheeler industry had seen its nadir in FY08. So on a lower base, FY09 appeared to be better, as the profit jumped by 65%. However, the company was yet to recover entirely. Despite high growth, absolute profit couldn’t bounce to the levels of FY07. Apart from that, the situation remained grim for finance companies in FY09, as economy slowed down and interest rates shot up due to monetary tightening.

Come FY10, the company seems to be on a recovery tide. The profit has more than trebled in the nine months ended December 2009. The recovery has come on the back of a revival in the non-banking financial companies (NBFC) sector. Even as banks struggled to extend loans, NBFCs posted much better results in December 2009 quarter.

The recovery in the sector has rubbed off even Bajaj Finance as deployments in all segments surged manifold. The disbursements of twoand three-wheeler loans grew by 58% in the nine months ended December 2009. In the same period, the disbursement of small business loans was thrice that of the corresponding period last year.

It is expected that the company will continue to post high growth in the next fiscal as well. The automobile sector moves in cycles. So if the past two years were marred by slowdown, it is expected that the next fiscal will signify the recovery. Besides, there are other encouraging signals, like growth in industrial production (IIP) that touched 11.7% recently after falling to zero in December 2008. Any kind of recovery in the economy will bring fruits to the finance providers as well.

VALUATION

Given a tremendous improvement in financials, the company’s stock price has shot up by more than five times since the start of current rally on March 2009. In the same time, the benchmark Nifty has gone up by 90%. Clearly, the stock has been an outperformer. The surge in stock price has also stretched the valuations, as the stock is trading at 13.7 times its trailing 12 months’ earnings. However, there is a scope for price to further go up. First, the company is on a high growth trajectory.

Two- and three-wheeler market moves in cycles and the recovery has started. It is expected that the good run will continue even in FY11. Second, the stock is still far away from its all time high price of Rs 529 per share that it reached in March 2006. So it makes sense for long-term investors to consider exposure to the stock at current level.

Bajaj Electrical

Bajaj Electrical a good buy on dips

BAJAJ Electricals is probably one of the best performers in recent years in the portfolio of companies that form part of the Bajaj Group, one of the oldest business houses in India. The company has shown consistent growth in revenues in the past five years.

BUSINESS:

Bajaj Electricals is a 71-year old company and operates in three major business segments — consumer durables, lighting and Engineering and Products (E & P). In the lighting segment the company manufactures and sells lamps, tubes and luminaries (light fittings) while appliances and fans are produced and sold through the consumer durable segment. E & P includes manufacturing, erection and commissioning of transmission line towers, telecommunications towers, highmasts lighting, poles and special projects, including rural electrification projects. At the end of FY09, the company’s rural electrification business received four major orders from an NTPC subsidiary, National Electric Supply Company Limited (NESCL) and National Hydro Power Corporation (NHPC) totalling Rs 360 crore. Export of all BEL’s products except of its engineering and projects business unit is taken care of by group company Bajaj International. Out of all the business units, the consumer durable segment is the biggest contributor to the revenues and profits, followed by the E&P and lighting segments.

FINANCIALS:

In last five financial years the company’s topline grew at compounded annual rate of 28%. After sluggish year on year growth in revenue for the quarter ending June’09, for the latest quarter net sales rose by 35% compared to the previous year. While the lighting division experienced a decline in revenue for the second quarter of this fiscal, it recovered by expanding by 15% in the latest quarter. The company’s operating profit and net profit posteda CAGR of 88% and 60% in the last five financial years. The profit margins, considered on a trailing year basis, have also improved since the quarter ending December’09. The company showed a healthy annually compounded growth of 53% in cash profit since FY05 while the dividend paid also grew at a CAGR of 61% during the period.

GROWTH PROSPECTS:

While the consumer durables segment is expected to continue its r contribution to total revenues, the company expects the E&P business units to act as a growth engine. Besides the rural electrification projects, Bajaj Electricals is also associated with the entire chain of power generation, transmission and distribution for the Commonwealth Games 2010. The company’s balanced business portfolio, which is both consumer centric and infrastructure oriented is expected to boost future growth.

VALUATIONS:

The company’s stock has outperformed the Sensex in the last five months and its market capitalisation has more than doubled in the last two years. At the current market price the P/E ratio is 12, a little above its average of 10 during the period. Given the growth prospects of the company and dividend payout strategy the stock is a good buy on dips.