hamara-bajaj.jpg

Bajaj Auto

A1

Industry: 2 & 3
  wheeler auto

After almost two months a new name of A1 business entered in our watch list. We are very active from last two and a half years in the Indian equities and very rarely any business from automobile sector had entered in our watch list which is trading at discount.

Talking about automobile sector, the very first thing comes into my mind or maybe too many is the ‘consumption story of India’. Most of the consumers in India start with buying two- wheeler first and then later on as family grows and they enhance in their careers get into four- wheeler.

There is a cut to cut competition in the market within this sector. Hero Motocorp, Honda motors, TVS, Kinetic and Bajaj Auto are few of the brands who are fighting for their dominance in the market.

In such environment it is hard to lay your hands in this business as risk associated to investment rises. An appropriate due diligence is required before investing into these businesses.

The very first thing we do is to look at the quality of its financial statements:

Bajaj Auto:

2008

2009

2010

2011

2012

A4

A4

A3

A2

A1

Bajaj Auto is being counted as an investment grade from last two years by Value operations private fund which gives us a green signal to proceed further and do more investigation.

As we mentioned earlier too that when you invest in the equity you are the passive investor and the only contribution from your side is your money.

To be successful manager of any business the manager should have two important qualities. The first, they should be a good capital allocatur and the second good managers of day to day activities.

Capital history

 bajaj_auto_capital_history

This business is growing its profits by compounded 42% from last 4 years.

Shareholders capital within this business had grown by compounded 39% from last 4 years.

Bajaj auto had learnt a lesson from the financial crisis of 2008 and it looks their most important agenda was to get rid of their debts and they have managed to do it. This business is really very profitable as it is growing its profits at substantial rate. The question is, can it sustain those growths?

Another important thing that we can’t neglect is the rate of capital contributed by its shareholders too. This sector is capital intensify as these businesses invests a lot in research and developments of new products. But as debt is under control we do expect shareholders contribution to drop down substantially in coming two to three years.

Bajaj auto’s business is cash rich and generates substantial cash from its operations. End of the day it is important that business have that quality so that they can create more value and which in return benefits to its shareholders.

The 2009 year was a very gloomy year for not only this business but to majority of the businesses
around the world. People were not willing to spend a single rupee as everyone was worried about their jobs and business prospects. The net operating cash flow really scared its management and this is the reason they started strategically to get rid of their debts from the balance sheet. Good job!!

The business sentiments of 2009 were again repeated in 2011, but this time they were well prepared and it didn’t impacted that much to this business performance from shareholders point of view.

The other important thing in regards to its cash flow is to make sure that business spends money within their own means. They have managed their cash flow pretty well. (We have not found them spend thrift!!)

 

Cash flow analysis:

bajaj_auto_cash_flow_analysis

Now comes the important part about its earnings. Consensus of analysts expects its earnings for 2013 to be Rs 107 and for 2014 Rs 130 per share. They had reported their earnings for 2012 Rs 103 and a growth of 20% for the year end 2014 looks to be very optimistic, especially after looking at the Jan and Feb sales figure and also their performance for the current year.(Are analyst expecting some kind of
turnaround in this business?… Time will reveal…)

Earnings:

bajaj_auto_EPS

Here is a quick glance at how the sales figures are going with this business.

Sales turnover:

bajaj_auto_net_sales 

The net sales had grown by 22% compounded rate from last 4 years.

Finally it comes to how the intrinsic values had behaved in the last 4 years. Are the managers were efficient to add value within their business? If I look at the chart below then the values have deteriorated after the 2011 year and management had not added any value to its business. If the consensus estimates are right (Rs130) for 2014 then we estimate its intrinsic value to be Rs 1850 for the year end 2014. It is trading at mere 1% discount to its intrinsic value.

bajaj_auto_chart

We at value operations private fund would like to see its full year results for 2013 and then only like to expose our funds money into this business and only start to buy if we get more discount to its estimated value ( Maybe we will start to look at buying once we are getting at least 10% discount price!!).