Bajaj Auto :FY13 annual report: Key takeaways: Credit Suisse

 Bajaj’s FCF declined from Rs29 bn in FY12 to Rs17 bn in FY13. A
large part of the decline can be attributed to higher capex (Rs3.5
bn out of which Rs2.1 bn was spent on aircraft), a delay in VAT
refunds (Rs3 bn) and higher receivable days (Rs3 bn).
 Losses at Bajaj’s Indonesian subsidiary widened from Rs120 mn to
Rs240 mn. It expects a pick-up in 2H FY14 once its products will be
sold through Kawasaki network. KTM benefitted from the smaller
made-in-India products and saw healthy >30% volume growth.
 FY13 also witnessed increases in both advertising (20 bp) and
R&D (40 bp) spends from Bajaj. Advertising spends in India
increased 40% in FY13 and we expect them to increase further
with new launches and rising competitive intensity.
 A region-wise break-up of Bajaj’s exports confirms what we have
been saying about strong growth in Africa, steady growth in Latin
America and a decline in Asia. While Bajaj started FY13 with an
optimistic outlook reflected in its capacity expansion at Waluj and
amount of hedges (US$1.4 bn), Bajaj’s lower hedges for FY14
(US$0.9 bn) reflect the uncertainty prevalent in export markets.

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We increase our TP to Rs2,132 from Rs2,126 as we have
made minimal changes to our earnings model (0.2%).
Exports: Bajaj’s export realisation in FY13 was 49.7 vs. 47.1 in FY12.
In FY12 actual exports were US$1,309 mn (US$100 mn lower than
the hedges for the year hence company had cash losses on these).
For FY14 company has taken hedges for US$904 mn (35% lower
than hedges taken for FY13) an indication of the uncertainty in export
markets. Typically, Bajaj has a policy to hedge 80-90% of its expected
exports exposure but given that last year they had excess hedges it
seems management is being a bit conservative.
While for FY13 the company took a combination of simple forwards
(30%) and range forwards (70%), it has opted for only range forwards
for FY14. Management has indicated a range of 54-60, so clearly
realisation in FY14 will be a lot better than in FY13.

Subsidiaries: Indonesia continues to do poorly for Bajaj with volumes
halving to 11,000 units in FY13 and loss doubling to Rs240 mn. Till
date Bajaj has invested Rs1.38 bn in the Indonesian subsidiary; it has
been proactive and has created an impairment provision for the entire
investment. Exports to Indonesia are expected to pick up in 2H FY14
once Bajaj starts distributing products in Indonesia via the Kawasaki
network. With the smaller made-in-India bikes, KTM witnessed good
32% volume growth, but with a 12% ASP decline, overall revenues
increased by only 16%; profits increased by ~20%.
Advertising and R&D spends inching up: Bajaj’s overall advertising
spends increased 25% YoY to Rs2 bn (after a large ~90% increase in
FY12). However, with foreign advertisements declining from Rs440
mn to Rs395 mn YoY, domestic ad spends actually increased by 40%
from Rs1.16 bn (0.9% of domestic sales) to Rs1.62 bn (1.2% of net
sales). Discounts and sales promotions remained negligible and under
control reflecting the pricing discipline in the industry.
While recurring R&D spending remained stable, capital R&D spending
witnessed a sharp jump from Rs0.4 bn to Rs1.1 bn resulting in R&D
as a percentage of sales increasing from 0.8% to 1.2%.
Capex: During the year Bajaj spent Rs2.1 bn in purchasing aircraft
taking the gross block on aircraft to ~Rs4.8 bn (also spent Rs2.7 bn in
FY08). CWIP increased by Rs2.1 bn during the year, probably on
account of RE60 related investments. This resulted in ~Rs6.5 bn
capex spend for FY13 which should normalise to ~Rs3 bn going
forward as per management’s guidance. With the bulk of the RE60
investments in both capex and R&D done, there can be only potential
upside from the product as we do not assume any volumes.
Working capital: WC increased by ~Rs8 bn primarily due to a ~Rs3
bn increase in loans and advances (on VAT refund from govt.) and a
~3 bn increase in receivables (as the company is stocking more with
dealers in a difficult market). Both these factors should reverse in
FY14 which combined with lower capex and high EBITDA growth
should lead to FCF nearly doubling in FY14 from FY13.
Others: Spare part sales continue to show a very healthy increase—
up 20% from Rs14 bn to ~Rs17 bn and now stand at 8.5% of net
sales. Export incentives declined from Rs5.6 bn to Rs4 bn on account
of the reduction in the drawback benefits from 5.5% of sales to 2% of
sales. Capacity was increased from 5.1 mn units in FY12 to 5.4 mn
units in FY13 with the entire 0.3 mn capacity expansion happening at
the Waluj motorcycle plant, which primarily caters to exports.