Bajaj Auto

Investors with a one-to-two-year perspective can consider an investment in the Bajaj Auto stock. The company had a dream run in 2009-2010, aided by a demand revival after the slowdown of 2008. This performance has extended to the first quarter as well. For the quarter ended June 2011, net sales grew 65 per cent year on year to Rs 3,737 crore. Profits almost doubled to Rs 590 crore. This year, the industry growth is expected to moderate to about 15 per cent. Nevertheless, robust volume growth aided by its ‘twin brand' strategy, higher operating margins from a superior product mix, and expanding exports lend visibility to the company's earnings in the near to medium term. At the current market price of Rs 2,688, the stock trades at a reasonable 17 times its estimated 2010-11 earnings, providing room for appreciation.



Discover and Pulsar

Bajaj's volumes and market share took a hit during the slowdown of 2008 when consumer preferences moved to the entry segment where Hero Honda is the market leader. But the revival of 2009-10 has worked in favour of the company.

To cash in on the recovery, it adopted a brand-centred strategy, focusing on differentiation and brand-positioning at the front end and efficiency at the back-end. This re-positioning helped the company cater to the aspirational ‘middle of the market' segment between executive and premium bikes as also the entry and executive bikes.

Towards this end, the company launched bikes such as the Discover 100cc (new), the XCD and Discover 135cc and the Pulsar 135cc. Priced at attractive points between two segments, these launches helped the company post a 40 per cent growth in domestic motorcycle sales as against the industry growth of 26 per cent.

Bigger and sportier bikes such as Discover and Pulsar now contribute about 80 per cent of domestic sales. Bajaj launched the Discover 150cc in mid-May, based on the Discover 100 cc platform. The company expects to achieve a 34 per cent market share in the motorcycles segment by the end of this year from about 24 per cent in 2009-10.Going forward, this focus on the twin brands of Discover and Pulsar is expected to keep the momentum on the volume front going.

Besides, over the longer term, the company is expected to benefit from its alliance with Austria-based KTM Power Sports. Bajaj, which has a 35.67 per cent stake in KTM, will gain in terms of access to technology as also the European markets. Under the KTM-Bajaj banner, 125-250cc bikes will be launched in the European markets by the end of this year and in India by the middle of 2011.

3-wheelers keep pace

Like two-wheelers, three-wheelers too witnessed good growth during the revival last year. 2009-10 saw a 30 per cent growth in the number of three-wheelers (passenger and goods carriers) sold domestically. While the company has about 48 per cent market share in passenger carriers, its presence in the goods carrier segment is limited.

To focus on this area and to regain the 50 per cent plus market share in the passenger segment, Bajaj has decided to develop its three-wheeler portfolio under the RE brand, ‘RE' standing for ‘more' like more mileage, space, comfort . This product line is expected to have five platforms, which could include a four-wheel platform too. While the RE 600 was launched last year, it introduced the RE 145 D and the RE 445M in April. The company has also lined up several other launches under RE brand during this year.

Exports to augment

Exports accounted for about 28 per cent of the net sales in 2009-10 and witnessed a 15 per cent year on year growth last year. Besides motor cycles, three-wheelers (passenger carriers) form a major chunk of the exports. In this segment, the company exports almost as much as it sells domestically. What bodes well for volume growth on the export front is that it focuses in a big way on under-developed markets such as Africa besides West and South-East Asia and Latin America. The company has hedged its expected FY2011 export exposure at Rs 46.5 to a US dollar.

Profitability

For the first quarter, operating margins stood at around 20 per cent. Thanks to rising input costs during this period, raw material costs as a percentage of sales increased from about 62 per cent a year ago, to 68 per cent. However, the company expects to maintain the 20 per cent margin levels in 2010-11.

This is not impossible, considering the better pricing power and improved realisations resulting from concentration on higher segment bikes and three-wheelers. Besides, commodity prices such as steel and aluminium are softening. On the net margin front too, the company is expected to gain from the enhanced utilisation of the Pantnagar (Uttarakhand) plant which enjoys tax sops.