Bajaj Auto expects the Indian automotive industry to go through turbulent times in the coming year while Nomura’s outlook on the company is ‘neutral’ and believes that the stock is worth Rs1,966
Bajaj Auto, even though fundamentally strong, expects the two-wheeler industry to remain under pressure, according to Nomura Equity Research (Nomura), in its annual report analysis to clients. Even its exports have been flat, with increased sales to Africa offset by lower sales in Asia, especially in Indonesia, and the Middle-East. According to the Nomura report, “The company is not so optimistic on India’s economic growth in FY14F and believes that though growth has possibly bottomed out, incremental growth will be very modest.” The brokerage is currently ‘neutral’ on the company’s prospects in the next 12 months and believes Bajaj Auto is worth Rs1,966 per share.
Bajaj Auto’s year-on-year (y-o-y) net sales have been weak in the last three quarters, growing by a mere 2% average. According to the annual report, Bajaj Auto sold 4.24 million units versus 4.35 million units in the previous year. Yet, according to Nomura, the company expects 8%-10% volume growth in FY14. Bajaj Auto’s operating profit dipped by 2% in the latest quarter, while its three-quarter y-o-y average growth rate is just 1%. Indeed, it is a difficult environment. However, its return on net worth and return on capital employed continue to remain very high, at 39% and 43% respectively. Nomura has stated: “We note that RoEs are suppressed by increasing cash balances—core RoEs are much higher. FY13 EBITDA margin dipped by around 70 basis points (bps) due to negative operating leverage.” According to Moneylife research, Bajaj Auto’s valuation is pricey, with its market capitalisation quoting at over 15.46 times operating profit.
With a deteriorating rupee, Bajaj Auto will expect some incremental revenue from exports but also has to protect its downside. It has hedged foreign exchange contracts worth $900 million as on 31 March 2013, which translates to 60% of its revenues, according to Nomura. Nomura expects that exports to Africa will be the key to Bajaj Auto’s performance in FY14, given that much of the Western world and Asian markets are already under pressure. Africa accounts for nearly half of Bajaj Auto’s total export volumes, surprisingly with a volatile Nigeria being a key market. The report also stated: “Volumes in Asia and the Middle East region declined by 22% y-o-y in FY13 led by a sharp decline in the Sri Lanka market due to increase in import duties. Meanwhile, volumes in the Latin American market (largely Columbia) increased by 9% y-o-y helped by the launch of Pulsar 200NS and Discover 125ST.”
However, a worrying point is Bajaj Auto’s performance in Indonesia, which has taken a hit as sales volumes declined 50% to 11,000 units in FY13. The report said, “Consequently, PBT (profit before tax) loss of the subsidiary increased to Rs24 crore in FY13 from Rs12 crore in FY12.
Nomura also finds that the company’s cash flow has become a little tighter, but not anywhere near unmanageable levels. Its analysis of the company’s annual report yielded the following observations:
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Politicians and media have played a huge part in this feeling of desperation through spreading bad news and harping on it. Positive news are being shunned as it is not sexy and gets no TRPs or ads
The mood in our country is such today that most people have decided that they should be unhappy. They have been driven to this situation by politicians and the media. They have hyped bad news and have made it look like a demon. Most governments in most times work the same way that this government has worked. All governments make good, bad and terrible decisions as this government has. This does not mean that nothing good has happened or is happening.
We had seen unprecedented growth of our economy from 2004 to 2008. The setback of 2008 we thought was a blip as growth rebounded in 2009. The international situation worsened again and we have paid the price for it and have seen our growth plunge again. The government went overboard in 2008 with its stimulus package which was largely pocketed by the industry without passing on the benefits to the customers. No opposition party took to streets and protested about this. Having done this the government was slow in withdrawing this mess. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) was unleashed and no political party really opposed it. Now the Food Security Bill also will not be seriously opposed. If it is opposed it will be for the fact that it may bring votes to the Congress! BJP has said that it would repeal FDI in retail when it comes to power. Has it said the same thing about MGNREGA and food security? Has it said that it will auction all resources? We will have to wait and see what they do if they come to power. Most likely we will hear that the circumstances have now changed and so the policies will stay. Even if the third front comes to power we are likely to hear the same thing.
The Comptroller and Auditor General of India (CAG) came out with two reports giving us potential loss figures that are frightening. But the same CAG for reasons best known to him and his team did not comment on what would be the price to the end consumer if these amounts were paid by companies to acquire these resources. Why has the CAG not commented on the potential loss to the government due to huge price difference of gas between domestic and international prices? Is the difference not a loss to the exchequer? Even in his exit interviews conducted by all channels separately no one asked him this question. The opposition parties played up the highest potential loss figures as projected by scam hungry media! The judiciary played its own part in canceling allocations and we are still nowhere near the truth about who made how much money and how. And that is the most important question really. Corruption by certain individuals is still to be proved in all scams—CWG, Adarsh, telecom, and coal and of course Railways. Attention has to be on the conviction of the culprits quickly. The media has lost interest and has moved on. The Uttarakhand tragedy is being treated as a great opportunity by the media for the past 15 days.
The government also bungled along. It took a long time to call the bluff of the TMC. It should have accepted the JPC on telecom, actually they should have initiated it. The bravado of some ministers in taking on opposition for nothing cost it dearly as parliament came to a grinding halt time and again and important legislations got relegated. This led to the feeling of policy paralysis which was caused by not only the ruling coalition but by all political parties.
The government made a spectacle of itself by having Pranabda in the finance ministry. He is no reformer. Shinde in home is another major comedy. Ashwini Kumar and Bansal fumbled. Robert Vadra harassed his own mother-in-law against the script. Mothers-in-laws are the harassers normally but I guess it does not apply to sons-in-law who are pampered even if they are as useless as Vadra.
Most Indians have to truthfully accept that their lives, in spite of all that has happened or has not happened as it should have, are today living better than they were 10 years back! This is especially true of the middle class—a class that is never satisfied and its appetite only grows as it hogs more and more.
Farmers who are willing to learn new ways are immensely better off. Minimum support price (MSP) has risen 100% and huge amount of loans are written off for them. The problem of lack of irrigation persists but the sufferers who have shown the grit have found alternatives as some stories illustrate. If the state has failed, it is because we have let it fail.
Yes things are bad. But remember we are all paying the price of what we as a nation have done wrong in the past and this price we will have to pay. The question is; are we ready to learn from these mistakes and take corrective actions? Or are we as usual going to wait for some ‘Avatar’ to descend and set things right for us?
Media has played a huge part in this feeling of desperation by mainly reporting bad news and harping on it. Calling the same idiots for discussions on prime time every day is hardly a way of finding solutions tour myriad problems. Media seems to be shunning every positive news because it is not sexy and gets no TRPs or advertising.
We as a nation have to say that yes we are going through bad times and all of us in some way or other are contributors to this. Let’s all now resolve to get out of this rut by doing sincerely and honestly what our individual jobs are before we point fingers at others.
We owe it to ourselves and this country to be positive. Our armed forces have just demonstrated this attitude. Let’s learn from them. And say, yes things are bad but we will make them better come what may!
Let’s shun prophets of doom represented by politicians of all colors and the prime-time media!
(Prof Anil Agashe teaches at Symbiosis and other management schools in Pune).
In a vague report lacking in conviction, Morgan Stanley Asia Pacific is bullish on India, but doesn’t explain why it is bullish, despite sounding a very cautious tone
In a brief but somewhat vague report, Morgan Stanley Asia Pacific is bullish on India even though many risks remain. The report titled “The Trailer May Be Over” says, “Leading indicators for equity returns (real rates, earnings, liquidity, sentiment and valuations) are in good shape though global liquidity has tempered at the margin. The conviction level of market participants is constantly challenged, though, because confirmatory signals remain feeble. We are a buyer of this fall.” However, the report does not elaborate the reasons of being bullish. The overall tone of the report is cautionary and lacks conviction. Morgan Stanley mostly states the risks and concerns that could affect the Indian market. They worry about three things.
Firstly, since there is substantial FII (foreign institutional investment) ownership in Indian stocks (though it has been declining), there is a risk of a panic in case FIIs start selling off. The report says, high FII ownership and position especially in the context of any “risk off”. “Risk off” is a term used in the financial world which means global speculators who set short-term prices will switch to lower-risk instruments or asset classes or country. It means shifting capital from places perceived to have high risk to places where there is low risk. India, presumably, is in the “high risk” category. In an earlier report titled, “What If the Tide Goes Out?” Morgan Stanley had said India is a country of “moderate risk” in case the US Federal Reserve suddenly stops its quantitative easing (QE) program. It had said, “This performance is consistent with the conclusions from our global team’s recent report What If the Tide Goes Out?, dated 13 June 2013 which ranks emerging economies in the order of risk to a sudden stop in QE – India features as a country with moderate risk.”
Morgan Stanley further states, “(FII) positions and ownership have declined. Both may have a bit more to fall before one can say that their overhang has completely gone away.” The graph below illustrates how FIIs have been leaving India in the last six months. Well, Moneylife has found this to be a contrarian indicator. We found out that when FIIs sell heavily, it is usually a good time to buy. You can check an exclusive analysis of FII flows in three parts over here (Part I - , Part II - and Part III - ).
The second risk, according to Morgan Stanley, is that the market is underestimating “tail risks”. It means that there is a possibility that something unforeseen could happen to the Indian markets, but no one knows what that is. Morgan Stanley feels this will happen, but doesn’t specify what the tail risks are. The graph below indicates that market is still “complacent about tail risks”, according to Morgan Stanley.
The last is the political risks that could make markets more volatile. However, many investors have already begun preparing for a volatile year leading up to the general elections, so this isn’t really a concern.
The fact is that current account deficit and the deterioration of the rupee, is a big concern. The report states, “While India has made progress with macro stability, the fact is that the current account deficit is still elevated making risk off events difficult to digest.” Yet Morgan Stanley feels the leading indicators look good (refer to first paragraph) and is bullish on India.