Favourable product mix drives growth

Bajaj Auto (Rs 410) PRASHANT TANDON

BUY +91 22 6593276
October 24, 2002 prashant.tandon@investsmartindia.com

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 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 leadership
position in the “Entry” (Boxer) and “Premium” (Pulsar) segments. Also, with the competition heating
up in the domestic two-wheeler market, Bajaj has a considerable buffer in the form of Exports and
Three-wheeler sales. At CMP of Rs 402, the scrip currently trades at 7.6x our FY03 and 6.7x our
FY04 estimates. We believe the stock represents a significant value proposition and have a BUY
rating with a 1-yr price target of Rs 575, an upside of 43%.
Yr end Sales chg EBIDTA chg PAT EPS chg PER P/BV ROCE EV/
31/3 (Rs m) (Rs m) (Rs) (x) (x) EBIDTA
2001A 30,259 -2.3% 1,782 -37.4% 2,626 25.9 -57.2% 15.5 1.5 8.9% 14.0
2002A 36,000 19.0% 4,937 177.1% 5,181 51.2 97.3% 7.9 1.4 18.9% 4.8
2003F 42,721 18.7% 6,371 29.0% 5,323 52.6 2.7% 7.6 1.2 18.2% 2.9
2004F 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 the
back of 6% y-o-y increase in
sales volumes and a 6% y-o-y Quarterly Sales and Avg. Realisations
increase in average realizations. 14,000 35.0
The increase in realizations 34.0
34.0
12,000
despite strong competitive 33.0
pressures reflects a shift in 10,000 32.3 32.3 32.0
31.4 31.3 31.0 31.7
product mix in favour of 8,000 30.8 31.0
motorcycles, strong Pulsar sales 30.0
6,000 29.2 29.0
that contributes as much as 25% 28.5
of average monthly motorcycle 4,000 28.0
volumes and higher three- 27.0
2,000
wheeler sales (14% y-o-y volume 26.0
growth). - 25.0
Q12001

Q22001

Q32001

Q42001

Q12002

Q22002

Q32002

Q42002

Q12003

Q22003

Motorcycles are the key revenue

driver (60% of total sales) of the
company and the volume outlook Gross Sales Avg. Realizations
of this segment continues to be
This document has been prepared by Investsmart India Ltd. (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
Investsmart 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
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 strong on the back of company’s new launches and prospects of a large rise in exports in FY04
following Kawasaki’s decision to commence global outsourcing with Bajaj Auto.

Three-wheelers, the highest-margin product for the company, are also now growing strongly driven
by exports as consumer countries (Bangladesh and Srilanka) are moving to cleaner fuels (CNG) for
which Bajaj is the primary supplier.

Scooter segment however continues to contract, but as this now accounts for only 11% of Bajaj
revenues 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-y
and 160bps on a q-o-q basis. Savings came from two-fronts: (i) Raw material costs as a percent of
net sales were down 210bps y-o-y from 63.7% in Q22002 to 61.6% in Q32003 and (ii) Other
expenses 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 FY03E
EV/EBITDA do not reflect the strong 29%YoY expected growth in operating profits. At CMP of
Rs 410, the stock currently trades at 7.6x our FY03 and 6.7x our FY04 earnings estimates. With
operating 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 fastest
growing motorcycle segments while robust Exports and Three-wheelers performance provide it
with 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 49,721.6
Avg. 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% 212 250.0
Excise Duty 1,067 1,430 1,365 1,474 8% 3% 5,256 6,303.0
Net Sales 8,141 10,682 9,298 10,501 13% -2% 37,170 43,419
Raw Materials 5,363 6,610 5,919 6,468 9% -2% 23,412 27,929.6
Staff Expenses 613 626 533 684 28% 9% 2,380 2,409.1
Other Expenses 1,171 1,537 1,507 1,302 -14% -15% 5,272 6,351.0
Total Expenditure 7,146 8,773 7,958 8,454 6% -4% 31,063 36,690
EBIDTA 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 3,069.4
Interest 12 3 11 2 -87% -55% 34 40.0
Depreciation 450 431 446 412 -8% -4% 1,797 1,887.0
EBT 1,548 1,820 1,920 2,030 6% 12% 5,878 7,871
Tax 340 660 460 710 54% 8% 1,837 2,548.0
PAT before exta items 1,208 1,160 740 1,320 78% 14% 4,041 5,323
Extra-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% 407,670 326,136
Scooters-ungeared 15,665 13,138 17,974 19,444 8% 48% 66,603 69,933
Step Thrus 19,358 13,832 16,254 14,597 -10% 6% 68,005 54,404
Motorcycles 119,570 216,376 152,312 196,319 29% -9% 656,018 898,745
Three Wheelers 34,780 43,603 44,332 50,598 14% 16% 160,694 184,787
Total 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 52.6
402
%SALES 7.6
Raw 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%

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%
 Vipul P. Dalal - Chief Operating Officer - Institutional Equity Business

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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.

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