Wednesday, November 8, 2006


Bajaj Auto is the second scrip in Sensex in alphabetical order and I try to understand the business here. India’s second largest manufacturer of two-wheelers has reported its second quarter and half-year ended September 2006 results on 18.10.2006.

Bajaj Auto Limited, with a market share of 32% in FY06 (23% in FY04), is the second largest player in the two-wheeler industry. In FY06, the sales mix (in volume terms) consisted of 82% motorcycles, 12% three-wheelers and the rest 9% step-thrus, ungeared scooters and geared scooters. Though the company has traditionally been a key player in the geared scooter segment, aggressive pricing coupled with a slew of new launches has resulted in a rise in market share in the motorcycle segment from 16% in FY00 to 32% in FY06. It has also entered into an agreement with Kawasaki for export of motorcycles to emerging markets

The Group has posted a Income attributable to consolidated group of Rs 2867.70 million for the quarter ended September 30, 2006 as compared to Rs 2631.30 million for the quarter ended September 30, 2005. Net Sales has increased from Rs 19695.70 million for the quarter ended September 30, 2005 to Rs 25388.60 million for the quarter ended September 30, 2006.

Motorcycle sales, which accounted for 91% of domestic sales and 70% of exports, continued with their dream run by notching up growth of 34% YoY and 105% YoY in the domestic and exports segments respectively. This is significantly higher than the industry growth rate of 15% YoY and 59% YoY in both the markets under consideration. The highlight of the company’s performance during the quarter was the inroads the company was able to make into the value segment of motorcycles.

On the three-wheeler front, Bajaj Auto continued to dominate the segment with a market share of 77%. The cargo segment continued to impress with a growth of 50% YoY during 2QFY07 as against the industry growth rate of 30% YoY.

Raw material costs as a percentage of sales have increased by 310 basis points (3.1%), and this is the primary reason why the company’s operating margins have contracted by 190 basis points.

Other stocks in the automobiles industry are Ashok Leyland, Eicher, Escorts, Hero Honda, Kinetic, LML, Mahindra, Tata and TVS.

Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling incremental unit comes down when demand recovers. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

In an interview, Sanjiv Bajaj, Executive Director, says that they are looking at building competetive advantage vis a vis Hero Honda and not just ape them. Time and customers will tell whether his efforts bear fruits or not.
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