Bajaj Auto: Evaluating the Working Capital Requirements

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Themes: Strategy
Pub Date : 2009
Countries : India
Industry : Financial Management & Corporate Finance

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Case Code : FM0021
Case Length : 13 Pages
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Bajaj Auto's Working Capital Requirement: Is Negative Working Capital Positive? cont..

During 1980s with the entry of Japanese and Italian scooter companies into the Indian market, domestic players like Bajaj Auto faced tough competition as the foreign companies adopted sophisticated technology while the latter used low-end technology. However, Bajaj Auto, with its strong brand image and other competency features maintained dominant position in the Indian auto industry. Soon, the company started investing in high-end technologies and focused on high-end offering, particularly in high-powered motorcycles. Year-on-year the company increased its production size and attained economies of scale.

In fiscal year 1994-1995, it produced 1 million vehicles and became a well-established exporter to several countries. It is India's largest exporter of two- and three-wheelers. In 2006-2007, exports of Bajaj motorcycles grew by 82% to 3,00,656 units and three-wheelers by 87% to 1,40,645 vehicles.¹⁴ In the same financial year, over 1,50,000 two-wheelers and three-wheelers sales were made to Sri Lanka and also over 1,00,000 vehicles were sold to Latin America.

Besides, establishing an assembly plant in Nigeria, Bajaj Auto in FY2006-2007 established a 95% owned joint venture in Indonesia which in coming years will play a key role in expanding the company's footprint in South-East Asia.¹⁵

The global turmoil and resultant low demand affected the Indian auto industry. Though the production volume increased, the third quarter of FY2008-2009 was particularly tough. Average monthly sales of motorcycles in India plunged by over 17% in the 3rd quarter of 2008-2009 with that of 2nd quarter - from an average of 5,24,939 units per month to 4,35,114 units. The sales and profits of Bajaj Auto tumbled - net sales and other operating income fell by 2.6% to INR 88.11 billion in 2008-2009. However, the company succeeded in maintaining double-digit operating Earning Before Interest, Tax, Depreciation and Amortisation (EBITDA) margin of 13.6% of net sales and other operating income for 2008-2009 rising to 15.2% margin for the fourth quarter (2008-2009). In addition, the robust exports of the company made some positive news. During 2008-2009, it exported an all-time high of 7,72,519 units of two and three-wheelers, representing a growth of 25% over the previous year (2007-2008).

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14]"Bajaj Auto's Sixty Second Annual Report: 2006-2007", http://www.bajajauto.com/report/AR_2006-07.pdf, 2006-2007
15]Ibid.