Bajaj Auto

The Bajaj Auto stock has fallen by about 40 per cent since the beginning of this month .

Better financial performance by its peer Hero Honda, a huge 50 per cent year-on-year drop in domestic two-wheeler sales in October, lacklustre three-wheeler performance and the company’s plans to cut production have weighed down the stock.

At the current market price of Rs 321, the stock trades at a price-to-earnings ratio of about 6.5 times its expected FY-09 earnings vis-À-vis Hero Honda’s valuation of 13 times. With the economy losing steam and production targets being scaled down, the medium term triggers for the stock are limited. But, investors with a three-to-four year perspective can hold on to their existing investments as a widening product portfolio, robust export growth, cost rationalisation measures and higher realisations from a better mix, inspire confidence about the company’s earnings prospects .
Domestic picture

The company has been facing challenging times since early 2007. For the year ended March 2008, it posted a 20 per cent decline in overall domestic volumes, thanks to the slowdown in the two-wheeler segment and a tightening of credit availability due to stiff interest rates. For the April-October 2008 period too, the overall domestic volumes fell by about 12 per cent.
Higher segment bikes

What holds promise for the company over the long-term is its focus on: One, the executive and premium segment bikes and, two, the smaller tonnage three-wheelers.

It already has a stronghold in the premium segment with its ‘Pulsar’ range of bikes. This has also spruced up its portfolio in the executive segment. It currently holds a near 50 per cent market share in the 125 cc plus segment.

A variant of the 125cc, Platina was launched ahead of the festive season. Before end-March 2009, the company will also launch two more bikes on the DTSi platform.

Besides, beginning 2010, Bajaj will also roll out bikes through its joint venture with Austrian sports bike manufacturer, KTM.

Exports to boost growth

Product launches may help Bajaj protect its turf in the local markets, but considering the pause in domestic sales, exports are expected to aid growth in the interim period. For the first seven months of the year, two-wheeler exports have grown by about 40 per cent year-on-year.

From about six lakh units in FY-08, the company expects to sell about 8.5 lakh units in the export markets in FY-09 and about 10 lakh units by FY-10.

A well-diversified clientele across West and South Asia, Africa and Latin America which are relatively less affected by the slowdown, the tie-up with Kawasaki to distribute its products in the ASEAN region and plans to foray into the European markets through KTM’s network, bodes well for volume growth on this front.
Scope for higher entry-level volumes

An increasing shift in consumer preferences from entry-level bikes to executive and premium bikes was witnessed last year. In line with this, Bajaj Auto shifted focus and has been concentrating on selling bigger, higher-margin bikes.

But volumes of Hero Honda, the market leader in the entry segment for the April- October 2008 period suggests a reversal of this trend in this period. The company has recorded a 15 per cent growth in sales in 75-125cc bikes while Bajaj showed a decline in this category .

Of course, the entry segment offers thinner margins. But a revival in this segment indicates that this segment offers the prospect of better volume growth now.

Since this demand is expected to have come from the rural segment, Bajaj can use its specialist rural dealerships to regain some of the lost market share in this category.
Financials

For the half-year ended September 2008, sales grew by a modest 9 per cent Y-oY. A large part of this growth has come from the increase in demand for and improved realisations from the sale of high-end bikes. Besides, the company’s focus on exports, given the slowdown in the domestic markets, has also aided growth.

Price hikes, softening commodity prices and improved realisations from a better product mix, led to operating margins expanding to 13.5 per cent.

For the first half, the company’s profits have fallen by about 17 per cent on a Y-o-Y basis (fall of 4 per cent in Q1 and 28 per cent in Q2).

The benefit of better operating margins has failed to reflect in the profits, due to the recognition of VRS expenses for the workers of the Akurdi plant to the extent of Rs 61 crore during the second quarter.

While this one-time expense may hold back profits temporarily, given the rich product portfolio, favourable export environment and ongoing cost control initiatives, the profits picture may be better in the near-to-medium term.