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bajaj

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Favourable product mix drives growth Bajaj Auto (Rs 410) BUY October 24, 2002 PRASHANT TANDON prashant.tandon@investsmartindia.com +91 22 6593276 Bajaj’s Auto Q22003 Results were above our estimates with Profit before extraordinary items increasing 78% y-o-y. The surprise came on two-fronts: (a) 6% y-o-y increase in realizations reflecting the robust performance of the company’s motorcycle (up 28% y-o-y) and three-wheeler (up 14% y-o-y) segments; (b) Increase in non-recurring income (wind pow
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  This document has been prepared by Investsmart India Ltd. (the Company) and is being distributed in India by the Company, a registered broker-dealer. Theinformation and opinions contained in the document have been compiled from sources believed to be reliable. The company does not warrant its accuracy,completeness and correctness. This document is not, and should not be construed as, an offer to sell or solicitation to buy any securities. This document may notbe reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose without prior permission from the Company.  © 2002Investsmart India Ltd. The Company and the analyst(s), including his dependant family members, does not have any interest in the securities recommended above. For  further information please call : Research (022) 6533333  Extn: 3217 Dealing : 6533114-17 An IL & FS initiative Favourable product mix drives growth Bajaj Auto ( Rs 410) BUY October 24, 2002 PRASHANT TANDON +91 22 6593276 prashant.tandon@investsmartindia.com Bajaj’s Auto Q22003 Results were above our estimates with Profit before extraordinary itemsincreasing 78% y-o-y. The surprise came on two-fronts: (a) 6% y-o-y increase in realizationsreflecting the robust performance of the company’s motorcycle (up 28% y-o-y) and three-wheeler(up 14% y-o-y) segments; (b) Increase in non-recurring income (wind power generation up 54%y-o-y and other income up 65% y-o-y).While competition is slugging it out in the “Executive” segment, Bajaj’s products enjoy leadershipposition in the “Entry” (Boxer) and “Premium” (Pulsar) segments. Also, with the competition heatingup in the domestic two-wheeler market, Bajaj has a considerable buffer in the form of Exports andThree-wheeler sales. At CMP of Rs 402, the scrip currently trades at 7.6x our FY03 and 6.7x ourFY04 estimates. We believe the stock represents a significant value proposition and have a BUYrating with a 1-yr price target of Rs 575, an upside of 43%.   Yr end31/3Sales(Rs m) chg  EBIDTA(Rs m) chg  PAT EPS(Rs) chg  PER(x)P/BV(x)ROCE EV/EBIDTA 2001A    30,259 -2.3%  1,782 -37.4%  2,626 25.9 -57.2%  15.5 1.5 8.9% 14.02002A    36,000 19.0%  4,937 177.1%  5,181 51.2 97.3%  7.9 1.4 18.9% 4.82003F    42,721 18.7%  6,371 29.0%  5,323 52.6 2.7%  7.6 1.2 18.2% 2.92004F    49,425 15.7%  7,630 19.8%  6,044 59.7 13.5%  6.7 1.1 19.9% 1.7 Sensex Target Pr. M cap (Rs bn) Free float 52w H/L(Rs) Avg. Daily t/o Bloomberg Reuters 2949 575 40.4 57% 548/322 52009 BJA@IN BJAT.BO !   Revenue growth driven by motorcycles, three-wheelers: Revenues were up 12% y-o-y on theback of 6% y-o-y increase insales volumes and a 6% y-o-yincrease in average realizations.The increase in realizationsdespite strong competitivepressures reflects a shift inproduct mix in favour ofmotorcycles, strong Pulsar  salesthat contributes as much as 25%of average monthly motorcyclevolumes and higher three-wheeler sales (14% y-o-y volumegrowth).Motorcycles are the key revenuedriver (60% of total sales) of thecompany and the volume outlookof this segment continues to be Quarterly Sales and Avg. Realisations28.531.431.331.029.232.330.831.732.334.0 -2,0004,0006,0008,00010,00012,00014,000 Q12001Q22001Q32001Q42001Q12002Q22002Q32002Q42002Q12003Q22003 25.026.027.028.029.030.031.032.033.034.035.0Gross Sales Avg. Realizations  Key to Ratings: (1) Buy, (2) Hold (3) Sell  Rating Definitions  : All Ratings are based on expected absolute upside over a 12-month period. Buy = 20%+; Hold = Between 10%.& 20%; Sell = less than 10%  strong on the back of company’s new launches and prospects of a large rise in exports in FY04following Kawasaki’s decision to commence global outsourcing with Bajaj Auto.Three-wheelers, the highest-margin product for the company, are also now growing strongly drivenby exports as consumer countries (Bangladesh and Srilanka) are moving to cleaner fuels (CNG) forwhich Bajaj is the primary supplier.Scooter segment however continues to contract, but as this now accounts for only 11% of Bajajrevenues we do not expect any significant impact on this account on the overall profitability. !   EBITDA margins up 510bps y-o-y from 14.4% to 19.5%: EBITDA margins were up 510bps y-o-yand 160bps on a q-o-q basis. Savings came from two-fronts: (i) Raw material costs as a percent ofnet sales were down 210bps y-o-y from 63.7% in Q22002 to 61.6% in Q32003 and (ii) Otherexpenses as a percent of net sales saw a 380bps y-o-y decline. !   Valuations are compelling:   We believe that stock’s current valuations at 2.9x FY03EEV/EBITDA do not reflect the strong 29%YoY expected growth in operating profits. At CMP ofRs 410, the stock currently trades at 7.6x our FY03 and 6.7x our FY04 earnings estimates. Withoperating profits set to grow at a 22% CAGR over FY02-05E, a re-rating in stock is indubitable.The company’s largest selling models, Boxer  and Pulsar  are well-positioned in the fastestgrowing motorcycle segments while robust Exports and Three-wheelers performance provide itwith a buffer from the likely strong competition in the domestic two-wheeler market. We have a“BUY” rating on the stock and a 1-yr price target of Rs 575, reflecting an upside of 43%.  Key to Ratings: (1) Buy, (2) Hold (3) Sell  Rating Definitions  : All Ratings are based on expected absolute upside over a 12-month period. Buy = 20%+; Hold = Between 10%.& 20%; Sell = less than 10%  Bajaj Auto Q22003 Results All Figures in Rs.m Q12002 Q12003 Q22002 Q22003 % y-o-y % q-o-q FY2002A FY2003E Gross Sales         9,208      12,112      10,663      11,974 12% -1%  42,425   49,721.6Avg. Realizations 29.4          32.5          32.5          34.4 6% 6%           31.2          32.4 Inc. from Operation  9,149      12,026      10,571      11,833 12% -2%  42,214   49,471.6 Windpower Gen. 59             86             92           142 54% 65%  212        250.0Excise Duty         1,067        1,430        1,365        1,474 8% 3%  5,256     6,303.0Net Sales         8,141      10,682        9,298      10,501 13% -2%  37,170      43,419Raw Materials         5,363        6,610        5,919        6,468 9% -2%  23,412   27,929.6Staff Expenses            613 626  533           684 28% 9%  2,380     2,409.1Other Expenses         1,171 1,537  1,507        1,302 -14% -15%  5,272     6,351.0Total Expenditure         7,146        8,773        7,958        8,454 6% -4%  31,063      36,690EBIDTA            994        1,908        1,339        2,046 53% 7%  6,107        6,729 EBIDTA/Vehicle         3,173        5,125        4,087        5,872 44% 15%         4,494        4,386 Other Income  1,016           346        1,037           397 -62% 15%  1,602     3,069.4Interest              12               3             11               2 -87% -55%  34          40.0Depreciation            450           431           446           412 -8% -4%  1,797     1,887.0EBT         1,548        1,820        1,920        2,030 6% 12%  5,878        7,871Tax            340           660           460           710 54% 8%  1,837     2,548.0PAT before exta items        1,208        1,160           740        1,320 78% 14%  4,041        5,323Extra-Ordinary Items              19               -           697               - -100% 0%  (1,170)               -Prior Period Adj               -             27             17             12 -31% -57%  29               -PAT         1,189        1,133        1,420        1,308 -8% 15%  5,182        5,323 Equity         1,012        1,012        1,012        1,012 0% 0%         1,012  1,011.8 VOLUME Scooters-geared     123,974      85,420      96,851      67,563 -30% -21%  407,670    326,136Scooters-ungeared       15,665      13,138      17,974      19,444 8% 48%  66,603      69,933Step Thrus       19,358      13,832      16,254      14,597 -10% 6%  68,005      54,404Motorcycles     119,570    216,376    152,312    196,319 29% -9%  656,018    898,745Three Wheelers       34,780      43,603      44,332      50,598 14% 16%  160,694    184,787Total Sales (Nos)     313,347    372,369    327,723    348,521 6% -6%  1,358,990 1,534,005 MARGINS EBIDTA 12.2% 17.9% 14.4% 19.5% 5.1% 1.6% 16.4% 15.5%Tax / PBT 22.0% 36.3% 24.0% 35.0% 11.0% -1.3% 31.3% 32.4%NPM 14.6% 10.6% 15.3% 12.5% -2.8% 1.9% 13.9% 12.3%EPS 11.7 11.2 14.0 12.9 -0.1 15.5% 51.2 52.6402 %SALES 7.6Raw Materials 65.9% 61.9% 63.7% 61.6% -2.1% -0.3% 63.0% 64.3%Staff Expenses 7.5% 5.9% 5.7% 6.5% 0.8% 0.7% 6.4% 5.5%Other Expenses 14.4% 14.4% 16.2% 12.4% -3.8% -2.0% 14.2% 14.6%Total Expenditure 87.8% 82.1% 85.6% 80.5% -5.1% -1.6% 83.6% 84.5%  Branch Offices This document has been prepared by Investsmart India Limited (the Company) and is being distributed in India by the Company, a registered broker-dealer. The information and opinions contained in the document have been compiled from sources believed to be reliable. The company does not warrant its accuracy, completeness and correctness. This document is not, and should not be construed as, an offer to sell or solicitation to buy any securities. This document may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose without prior permission from the Company. © 2002 Investsmartindia Ltd. The Company and the analyst, including its dependent family members, does not have any interest in the securities of the company recommended. An IL&FS initiative RESEARCH DIRECTORY Research : Gaurav Misra Pharmaceuticals / Oil & Gas Sales : Ajay AroraNeelesh Surana FMCG / Metals Ravi MalaniNiranjan Pradhan Cement / IT Suresh BabuSeshadri Sen Banking / Media / Economy / Strategy Nandan ChakrabortyPrashant Tandon Auto / Auto Ancillaries / Capital Goods V BalakumarSuman Horo Mutual Fund / Fixed Income / Derivatives Madhav SamantKajal Lakhani Mutual Fund / Fixed Income www.investsmartindia.com l E-mail : research@investsmartindia.com Ahmedabad Ground Floor, Shivalik Complex,Near Panchwati Circle, Ambawadi,Ahmedabad - 380 015Tel. : 079 - 6445473  / 6430435079 - 6440172 / 6440168Fax : 079 - 6440173 Bangalore HDFC House, Ground Floor51, Kasturba Road;Bangalore - 560 001Tel. : 080 - 2126007 - 6001Fax : 080 - 2122680 Bangalore - ITPL International Tech Park, No.G - 03, Mall Area,Whitefield Road, Bangalore - 560 066Tel. : 080 - 8411455 / 8412163Fax : 080 - 8411458 Bangalore - Jayanagar 7/24, 1st Floor, 11th Main, 4th Block,Jayanagar,  Bangalore - 560 011Tel. : 080 - 6557870 / 6557873 - 75Fax : 080 - 6557879 Bangalore - Koramangala 650, 17th Main, VI Block, Koramangala,80 Feet Road, Bangalore - 560 095Tel. : 080 - 5525853 - 5Fax : 080 - 5525867 Chandigarh SCO 24 - 25, Sector 9 D,Madhya Marg, Chandigarh - 160 017Tel. : 0172 - 741636 / 741541Fax : 0172 - 741492 Chennai 13/2, Ramkoti, 2nd Floor,Nest to Odyssey, 1st Main Road,Gandhi Nagar, Adyar, Chennai - 600 020Tel. : 044 - 4405501 - 3Fax : 044 - 4405504 Coimbatore 1023, Eureka Chambers,Avanashi Road, Coimbatore - 641 018Tel. : 0422 - 211730 / 214485Fax : 0422 - 214410 Delhi Flat No. 103, Akash Deep Building,26, Barakhamba Road, New Delhi - 110 001Tel. : 011-3318205 - 10Fax : 011- 3318210 Goa Sandeep Apartments,Shop No. 3, 4, 5,  Dr. Dada Vaidya Road,Near Hotel Samrat, Panaji - 403001 GOATel. : 0832-234353-6 / 235191Fax : 0832-234355 Hyderabad G2, Ashoka Bhoopal Chambers,S. P. Road, Secunderabad - 500 003Tel. : 040 - 7890582 - 87Fax : 040 - 7890588 Jaipur 3rd Floor, O-19A,Ashok Marg, C-SchemeJaipur - 302 001Tel. : 0141-371621-26Fax : 0141-401285 Kolkata Constantia, Ground Floor,11, Dr. U. N. Brahmachari Street, Kolkata - 700 017Tel. : 033 - 2813257- 60Fax : 033 - 2810060 Kolkata - Dalhousie Branch RNM House, Basement 9 & 10,3B, Lal Bazar Street, Kolkata - 700 001Tel. : 033 - 2424195 / 2424256 / 2424326Fax : 033 - 2212881 Kolkata - Salt Lake DC - 23, Sector - 1,Salt lake City, Kolkata - 700 064Tel. : 033 - 3212689 - 90Fax : 033 - 3212688 Mumbai - Bandra Kanaiya Building, 250-B, Linking Road,Bandra (W), Mumbai - 400 050Tel. : 022 - 6558496 - 97 / 6559259 - 60Fax : 022 - 6558499 Mumbai - Fort Branch Sekasaria Chambers,139, Nagindas Master Road ,Fort, Mumbai - 400 023Tel. : 022-2634903 - 4Fax : 022-2678981 Pune Construction House,796/189-B, 2nd Floor, Bhandarkar Road,Deccan Gymkhana, Pune - 411 004Tel. : 020-4030810 - 13Fax : 020-4030815 Vipul  P. Dalal - Chief Operating Officer - Institutional Equity Business
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