Bajaj Auto is the kind of blue chip stock that one wished one had just bought and forgotten about. Bajaj Auto came out with its IPO in May 1985. If one had invested a meager sum of Rs. 1 lakh at that time, today, after about 25 years, the investment would be worth a staggering Rs. 6.19 crores. That’s a cumulative return of 61,821% or a CAGR of 29%.
Can one go wrong with a blue chip like Bajaj Auto? Stocks like Bajaj Auto are meant to form a part of the core portfolio, to invest and to forget.
Shankar Sharma has always been bullish on Bajaj Auto. In May 2010 he gave out a buy call on Bajaj Auto when it was quoting at Rs. 1,067 (adjusted for bonus). Since then, Bajaj Auto galloped to a 52 week high of Rs. 1,665 in November 2010 before settling at the CMP of Rs. 1,465, reflecting a gain in excess of 40% (see Shankar Sharma’s stock picks with “Terrific Value”).
The interesting aspect is that Shankar Sharma considers the CMP of Rs. 1,465 “extremely cheap“. Shankar Sharma gave strong logic to support his theory. He said:
“Bajaj Auto is one stock, especially in light of its recent underperformance against Hero Honda. It has made Bajaj look extremely cheap. Hero Honda is now at 18-19 times FY12, Bajaj is 14-14.5 times FY12 and if you take out the cash, then it’s probably 9.5 times FY12 numbers. That’s really cheap for a company with a 69% ROE and visible earnings growth of 20%+. This is just what Tata Motors looked like a year back at about 550-600, Bajaj Auto is exactly in the same situation. Deeply undervalued, great business model, hard to lose money buying this stock right now.“
| Bajaj Auto’s Quarterly Results |
| Rs in Cr. | Dec 2010 | Sep 2010 | Jun 2010 | Mar 2010 |
| Sales Turnover | 4,177.08 | 4,341.82 | 3,890.06 | 3,399.45 |
| Other Income | 99.46 | 83.71 | 81.67 | 42.50 |
| EBITDA | 948.78 | 980.88 | 858.60 | 772.87 |
| Net Profit | 667.11 | 682.08 | 590.15 | 528.65 |
One can easily see what it is about Bajaj Auto that has mesmerized Shankar Sharma so much. Bajaj Auto came out with very strong results in the 3rd Quarter and 9 months ended December 2010. Bajaj Auto‘s EBITDA margin was 20%+, the highest in the Industry. Bajaj Auto‘s ROCE (operating) was 223% while its EPS for the year (9 months annulaized) was Rs. 89.3 as compared to Rs. 58.8 in the last year.
Bajaj Auto‘s management stated that it was confident of achieving EBITDA margins of 20% for the year.
| Bajaj Auto’s Annual Financials |
| Rs in Cr. | Mar 2010 | Mar 2009 | Mar 2008 |
| Sales Turnover | 12,152.74 | 9,058.75 | 9,692.58 |
| Net Profit | 1,597.22 | 535.79 | 749.56 |
| Total Shareholder’s Funds | 2,716.93 | 1,812.79 | 1,623.57 |
| Total Debt | 1,361.03 | 1,595.36 | 1,346.38 |
| Earning Per Share ( Rs) | 103.75 | 33.29 | 48.41 |
If one extrapolates the 9 month EPS of Rs. 67 for the year, the annual EPS should be in the range of Rs. 89.3. At that EPS, the price of Rs. 1,465 is discounted 16 times.
Bajaj Auto is sitting on a huge stash of cash of Rs. 3,821 crores (as of December 2010) which works out to Rs. 132 per share. If that is deducted from the CMP of Rs. 1,465, one has a price of Rs. 1,333 and a PE of 14.92 as of March 2011 which is not unreasonable at all given the scorching growth rate of Bajaj Auto.
The interesting thing is that Shankar Sharma equated Bajaj Auto to what Tata Motors (another of his stock picks) was a year ago when it was quoting at Rs. 500-600. This is very significant because in that time, Tata Motors has doubled!
Whether Bajaj Auto doubles or not, one has to agree with Shankar Sharma that Bajaj Auto does have a great business model and is a must-have blue chip stock for every portfolio. We are certainly going to add Bajaj Auto to our stock portfolio at every dip.
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