Bajaj Auto FSA

8/8/2019 Bajaj Auto FSA

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Group 7

Ram Sevak 0911335Vandit Bhurat

Sandeep NairM. Siril Nitesh

BAJAJ AUTO

LIMITED

2009 September 13th Financial Accounting | Financial Statement Analysis

Report Submitted to Prof. Jayanthi Iyer, IIM Bangalore


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Table of Contents

Industry Overview ................................................................................................................................... 3

Company Overview ................................................................................................................................. 3

Financial Statement Analysis ................................................................................................................... 4

Changes in Accounting Policies, Specific Observations in the Annual Report ............................... ........... 6

Stock Market Assessment of the Company............................................................................................... 7

Overall Evaluation of the Company ......................................................................................................... 8

Data for the Analysis ............................................................................................................................... 9

Key Financial Data for the Company ................................................................................................. 10

Common-Size Financial Statements ................................................................................................... 11

Comparative Key Indicator Trends for the Last Five Years ................................................................ 13

Ratio Trends for Previous Five Year.................................................................................................. 14

Ratio Computations ........................................................................................................................... 16

Bajaj Auto Limited | Comparison with the Industry ............................................................................ 17

ENDNOTES.......................................................................................................................................... 18


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Industry Overview

The major players in the two and three wheeler industry in India are Bajaj Auto Ltd., TVS Motor

Company, Yamaha Motor India, Kinetic Engineering and Hero Honda Motors Ltd. The industry

is dominated by family owned Indian business houses. Already beset with increasing steel costs

before the ongoing global financial crisis, the industry has been witnessing lower order books,

lower capacity utilization and severe pressure on prices.

For Indian two-wheeler industry, rural India is going to be the next growth driver. Unsurprisingly

India is seeing the penetration of two-wheelers increasing at a rapid pace driven by the rise in the

household incomes, reducing trend in excise duties and easy availability of two-wheeler financei.

Though the two wheeler industry is presently passing through a rough patch, long term outlook is

expected to be healthy with increase in market penetration levels across geographies and

customer segments.

Company Overview

Headed by Rahul Bajaj, Bajaj Auto is India's largest and the world's 4th largest two- and three-

wheeler maker with annual turnover of USD 936 millionii. Over the last decade, the company has

successfully changed its image from a scooter manufacturer to a two wheeler manufacturer. Its

real growth in numbers has come in the last four years after successful introduction of a few

models in the motorcycle segment. However the cascading effects of Tata Nano offering will be

felt more severely by Bajaj Auto because of overlapping targeted customer bases. Besides itself

being a profitable segment for auto makers, the company is expanding its spare parts business

with particular focus on remote areas keeping future market growth in perspective.

Major challenges and opportunities before the company are making a dent in untapped consumer

groups of the market e.g. commuter segment of motorcycles where Hero Honda is the market

leader, and maintaining companys growth in export revenue. In three-wheeler market segment

where the company is undisputed market leader, it has performed worse than the market. In the

wake of rising fuel costs, increasing environmental awareness and the tightening of emission

norms across the world the company should focus on improving fuel efficiency of its offeringsiii

.

Its three-wheeler business remains particularly vulnerable on this account with threats from new

low-cost substitutes, systemic credit crunch and shifting customer preferences towards safer,

convenient and cheaper modes of travel.


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Decrease in ROA 4.0938994

Contribution of Profit Margin in

decline of ROA 1.6566487Contribution of Asset Turnover

in decline of ROA 2.4372508

We see that Return on Assets has decreased more because of poor utilization of available assets

than decline profit margins. Considering the costs that company incurred in closing a plant at

Akurdi 183.33 crore this year through offering VRS to affected employees, poor utilization of

assets can downplay companys profitability in near future. NOPAT profit margin has also

declined from 13.82 to 11.35% YoY.

Although current ratio seems to improve, it is more because of advanced tax paid to IT

authorities although company debtors outstanding have increased. Quick ratio has not improved

because both inventory and inventory holding period remains the same.

Operating cycle has also increased because of increase in debtor collection period. Although

systemic liquidity crunch is understandable, company has NOT really disclosed its composition

of sundry debtor. All debtors barring 5.9 million have been put under other and deemed as good

providing a miniscule 53.2 million Provision for Doubtful Debts. This does raise questions

about the quality of debts given under this head.

The company has more than twice the industry average debt-to-equity ratio

iv

in a period ofvolatility in demand, is also not optimistic for the company though the company has NO

secured loans. The companys recent investment in acquiring an Indonesia based auto firm

seems to be in right direction as foraying into diverse geographies will offset some of

demand volatility at home. The companys increased interest payment towards fixed loans

taken has reduced its interest coverage ratio significantly.

By the transfer of the manufacturing Undertaking from erstwhile Bajaj Auto Ltd. under the

provision of the Companies Act, a technical knowhow of 37.3 million was transferred to the

present Bajaj Auto Limited boosting current assets by an equal amount.


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Changes in Accounting Policies, Specific Observations in the Annual Report

1. The company has to close down its Akurdi and expense Rs 1833 million as VRS toemployees in July 2008. The company changed its existent accounting policy in such

matters and now distributes the expense over two years instead of previous one. By

change in accounting policy altogether the company has boosted its previous years

profit. The change has also been noted by Auditors.

2. In view of the companys investment in its Indonesian subsidiary and subsequent losses,it has not made any provisions treating all such losses to be of not permanent nature. In

view of prolonged financial crisis and overall uncertainty in customer demand, it might

not be prudent for long-term liquidity of the company.

3. In P&L account of the company, the prior period expenses are present for BOTH periods. Now since the financial statement is prepared by professional auditors, this fact does

reflect badly on the auditor and in turn on Bajaj Auto. We analyzed the Hero Honda

statements for FY 2007 and FY 2008 but we could not find such errors in that report.

4. The company has negative operating working capital but it has taken short termunsecured loans from a foreign bank packing credit facility against exports.

5. For 2008 and 2009, PAT has decreased because of added provision for VRS by thecompany and mark to market loss to the company.

6. The company continues to earn more than 2000 crore Rs. through foreign exchangeearnings taken as part ofOther Income. Interestingly company has liberally changed its

accounting policy hedging highly probable forecast transactions recognizing gains and

losses at the occurrence of transaction rather than at the end of accounting period.

7. The companys R & D expenditure has decreased despite their commitments to makethree-wheeler offerings more efficient (Management Discussion and Analysis)! This can

be boomerang when the market dynamics shift towards fuel efficiency in view of

increasing fuel costs or legislation.

8. Companys net cash flow from operations is commensurate with its net income aftertaking into account exceptional VRS expenses during the year.

9. If we calculate net free cash flow after taking out companys investment in other firms(~30 crores), it is not sufficient to meet cost of acquisition of new assets in domestic and

international markets.


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Stock Market Assessment of the Company

Profitability & valuation FY 08 FY 09

EBITDA Margin (%) 14.3 13.8

RoE (%) 47.6 38

RoCE (%) 42.4 36

Net Dividend Yield (%) 2.1

The company has declined both in terms of Return on Equity and Return of Capital Employed

yet owning to expected pay-off through its investment in subsidiaries and solid cash position.

Higher RoE than RoA also implies that the company is earning more per rupee for shareholders

funds than per rupee of assets. But the high Debt-Equity ratio (0.83) limits the companys ability

to leverage more. The companys decision to produce more cars more from their Pant Nagar

factory in Uttarakhand will attract lesser excise duty because of its location in Preferential Area.

This will result in higher EBITDA. Apart from this, their cost savings efforts are paying off.

They have also given absolute higher dividend to shareholders (22) as compared to previous year

(20 Rs.) even in situation of need for liquidity. Furthermore future company growth is going to

come from realizing more volumes in sales. Therefore, we will like to place Bajaj Auto under

Accumulate rating on the stock.

The stock market has also reaffirmed this conclusion during Q1 2010 performance of Bajaj Auto

stocks on BSEv.


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Overall Evaluation of the Company

As Chairman Rahul Bajaj himself says growing sales without eroding profit margins is

challenging in the present economic environment. In Bajaj Autos case however both are

declining. The company is indeed betting high on untapped international markets in spite of

bleeding in Indonesia. If Bajaj Autos international foray doesnt prove to be successful because

of its dependency on macro-economic environment apart from its inexperience in highly

competitive Indonesian market, it may find itself in a severe cash crunch situation.

That being said, company has advantages in terms of relatively conservative credit policies it

has zero secured loans and a major portion of its cash is in scheduled banks and government

securities. Factoring liquidity and solvency ratios into account, companys efforts to rationalize

costs are indeed paying (Chairmans Report) and the company looks stable in the short term.

From a medium-to-long term perspective, the company needs to focus on its cost-cutting

measures while increasing investment in R & D. When the economy rebounds, sales in both

commercial and consumer segments of the automobile industry will pick up rapidly - leaving no

room for immediate increase in output. Considering companys frozen plans to increase

manufacturing capacity, the present seems to be opportune time to do so.


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Data for the Analysis


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Key Financial Data for the Company

Parameter FY

2008-09 2007-08

PAT 6564.8 7559.5

Sales 84369.4 86632.9Average Total Assets 58587.4 49411.6

Average Shareholders Equity 18696.9 15875.9

WAN Equity Shares (crores) 1.44 1.39

Current Assets 23252.7 16497.1

Current Liabilities 24375.6 18772.9

Inventory 3388.4 3496.1

Average Debtors 3586.5 2753.1

COGS 65932.6 67943.3

Average Inventory 3388.4 3496.1

Secured Loans 0 69.5Unsecured Loans 15700 13273.9

PBT 9580.9 11347.3

Interest Expense 210.1 51.6

Average Stock Price 619.825 Unlisted

EPS 45.36 54.18

Dividend per Share (Rs.) 22 20

Book Value per Share (Rs.) 129.8395833 114.2.151

Market Price per Share 1271.85 NA


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Common-Size Financial Statements

Common Size P&L Statement

2009 2009 2008 2008(%) (%)

Sales and Other Income 89322.60 100.00 91688.40 100.00

Expenditure

Materials 64634.70 72.36 66203.70 72.21

Other Expenses 11692.20 13.09 11553.00 12.60

Interest 210.10 0.24 51.60 0.06

Depreciation & write downs 1297.90 1.45 1739.60 1.90

Less: expenses capitalized 144.20 -0.16 -230.40 -0.25

77690.70 86.98 79317.50 86.51

Operating profit before tax and exceptional items 11631.90 13.02 12370.90 13.49

Exceptional Items 2051.00 2.30 1023.60 1.12

Profit before tax 9580.90 10.73 11347.30 12.38

Tax 3016.10 3.38 3787.80 4.13

Profit after tax and exceptional items 6564.80 7.35 7559.50 8.24


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Common Size Balance Sheet

Sources ofFunds Mar-09% of totalLiabilities Mar-08

% of totalLiabilities

Shareholders' FundsShare Capital 1446.8 2.39 1446.8 2.93

Reserves and Surplus 17250.1 28.55 14429.1 29.20

Loan Funds

Secured Loans 0 0.00 69.5 0.14

Unsecured Loans 15700 25.98 13273.9 26.86

Deferred Tax Liabilities 1647.9 2.73 1419.4 2.87

Current Liabilities & provisions

Liabilities 12134.1 20.08 10432.5 21.11

Provisions 12241.5 20.26 8340.4 16.88

Total liabilities 60420.4 100.00 49411.6 100.00

Application ofFunds

Fixed Assets 15480.9 25.62 12928.2

Technical Know How 162.6 0.27 105.3 0.21

Investments 18085.2 29.93 18571.4 37.59

Current Assets, Loans &

Advances

Inventories 3388.4 5.61 3496.1

Sundry Debtors 3586.5 5.94 2753.1 5.57

Cash & Bank balances 1368.7 2.27 560.7 1.13

Other Current Assets 1256.8 2.08 799.5

Loans & Advances 13652.3 22.60 8887.7 17.99

Miscellaneous expenditure

VRS Compensation 1833 3.03 0 0.00

Deferred Tax assets 1606 2.66 1309.6 2.65

Total assets 60420.4 100.00 49411.6 100.00


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Comparative Key Indicator Trends for the Last Five Years

Please note that we have analyzed these ratios separately for FY 2008, 2009 and FY 2005, 2006,

2007. Because of restructuring by the company in 2008, comparative data from the previous

years is not applicable for analyzing these ratios uniformly across five years. Hence ratio

analysis has been split between these two periods.

Trend Analysis FY2008 FY2009 FY2005 FY2006 FY2007

Shareholder's Funds

Share Capital 100 100 100 100.0 100.0

Reserves Surplus 100 119.6 100 115.7 134.7

Total Long-Term Loans 100 117.7 100 119.6 132.5

Total Short-Term Loans 100 129.9 100 126.9 150.1

Total Debt 100 123.8 100 123.2 141.3

Total Liabilities 100 124.4 100 122.9 145.1

Total Assets 100 118.5 100 114.9 131.5

Fixed Assets 100 119.2 100 101.3 113.6

Current Assets Net -100 -49.3 -100 -337.2 -251.7

Other Assets 100 157.2 100 105.2 52.8

Capital WIP 100 58.9 100 289.2 322.0

Sales Net 100 102.7 100 130.2 161.9

Operating Expenses 100 98.1 100 126.1 161.9

Operating Profit 100 92.9 100 150.1 153.8Profit After Tax 100 86.6 100 143.7 161.4

Interest 100 403.8 100 42.8 757.1


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0

20

40

6080

100

120

140

2005 2006 2007 2008 2009

Reserves & Surplus

0

20

40

6080

100

120

140

2005 2006 2007 2008 2009

Long-Term Loans

0

50

100

150

2005 2006 2007 2008 2009

Short-Term Loans

0

50

100

150

2005 2006 2007 2008 2009

Total Debt

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009

Total Assets

0

100

200

300

400

500

600

700800

2005 2006 2007 2008 2009

Interest


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Ratio Computations

2008-09 2007-08

Profitability Ratios

Profit Margin 7.7810201 8.7259

Asset Turnover 1.4400605 1.753291

Return on Assets 11.20514 15.29904

Return on Equity 35.111703 47.6162

Earnings Per Share 455.88889 543.8489

Liquidity Ratios

Current Ratio 0.9539334 0.878772Quick ratio 0.8149256 0.692541

Debtor Turnover 23.52416 31.4674

Inventory Turnover 19.458328 19.43403

Solvency Ratio

Debt - Equity Ratio 0.8397114 0.840481

Liabilities - Equity Ratio 2.1434355 2.022959

Interest Cover 45.601618 219.9089

Average Inventory Holding Period 18.501075 18.52421

Average Debt Collection Period 15.303416 11.44041

Operating Cycle 33.804491 29.96462

Capital Market Ratios for FY 2008-09

Price - Earnings Ratio 13.664572

Dividend Yield 3.5493889

Price - Book Ratio 0.9795549


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Bajaj Auto Limited | Comparison with the Industryvi

0

10

20

30

40

50

60

Current DebtorTurnover

InventoryTurnover

Debt -Equity

InterestCover

Bajaj Vs. Industry | Key Ratios

Bajaj Auto Ltd.

Industry


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ENDNOTES

ihttp://www.researchandmarkets.com/.../indian_two_wheeler_industry.pdfAn Overview Indian Two-Wheeler

Industryii http://www.bajajauto.com/about-bajaj.asp Bajaj Auto - A Company Overviewiii http://economictimes.indiatimes.com/News/News-By-Industry/Auto/Two-wheelers/Bajaj-Auto-launches-eco-

friendly-autorickshaw/articleshow/4679892.cms Bajaj Auto Launches Eco-Friendly Autorickshawsiv http://www.siamindia.com/scripts/IndustryStatistics.aspx Automobile Industry Statisticsv

http://www.equitymaster.com/result.asp?symbol=BAJAU The Performance ofBajaj Auto 2008 through Aug 2009vi http://www.capitaline.com/user/framepage.asp?id=1 Key financial ratios of the Auto/Mobike Industry

Documents

Bajaj Auto FSA