Bajaj Auto

Investors holding the Bajaj Auto stock can consider taking profits at the current price levels. The stock has run up quite sharply from its low of Rs 294 in December 2008. Trading at Rs 1133, the trailing price-earning ratio for the stock is 17 times.

Bajaj Auto is still at a discount to the BSE Auto basket (21 times PE) though it is almost on a par with the market leader, Hero Honda (trading at 17.8 times PE).

After a poor show until the December quarter of 2008, Bajaj Auto has seen an improvement in sales numbers, driven by easier credit availability, particularly for the high-end models. The company’s earnings over the next few quarters may also benefit from excise duty cuts and lower input costs.

However, across segments, be it motorcycles, three-wheelers or scooters, planned launches will hold the key to the company regaining lost market share. In this backdrop, the sharp improvement in the stock’s valuation limits the room for upside.
Two wheelers

Bajaj Auto offers eight models in the two-wheeler space, catering primarily to the executive and premium segments. In 2008, it reduced its focus on economy bikes to concentrate on executive and premium bikes, taking the view that these segments offer better long-term potential.

But with the credit squeeze that affected higher value purchases, the strategy shift appears to have backfired as the bulk of growth in the two-wheeler sector over the past year came from sub-125 cc motorcycles, an area of strength for its rival - Hero Honda.

With sales volumes declining for the year, Bajaj Auto’s market share in motorcycles also dropped from 54 per cent in FY-08 to 42 per cent in FY-09.

An improvement is evident in the premium bike sales in recent months, with sales recovering by about 40 per cent from their low in December 2008. This has come from the XCD range, mainly the XCD — 135 launched in January 2008 apart from the continued interest in its flagship model — Pulsar, including the new variants launched in May.

On a year-on-year basis, growth still remains muted. When compared to last year’s numbers, the year-to-date sales are down by 18 per cent, while volumes sold in May 2009 were 8 per cent below its last year’s numbers.
Riding on launches

Plans to strengthen the premium segment include the launch of another Pulsar. Pulsar enjoyed a 60 per cent market share in the total bikes sold in the above 150 cc segment until FY-08. Its share-to-sales has now fallen to 56 per cent.

Given the intense competition from foreign players in terms of product offerings and pricing, it is crucial for the company to strengthen the Pulsar brand.

The same is the case with its three-wheelers segment as well, which accounts for 15 per cent of the total volumes.

The success of the launches will be vital to revive the market share that the company ceded to Piaggio and Mahindra & Mahindra last year. Bajaj Auto also plans to launch a scooter that is likely to rival Honda Motors’ Activa. Kristal (rolled out in 2007) is yet to capture significant share (its current market share even less than one per cent).

The ambitious compact car project has its share of uncertainties. With an investment of Rs 1,000 crore, the car is expected to be launched by end-FY-10.

However, the company has not yet signed MoU with its partners, Nissan and Renault, which will be providing technology apart from each of them holding 25 per cent stake in the JV. Competition in this segment is also intense, as Nano has already garnered sizeable bookings and Maruti Suzuki is aggressively adding to its line-up.
Unfulfilled promises

Bajaj Auto has increased its stake by another 25 per cent in KTM Sportmotorcycle, a significant player in high-end bikes. In early 2008, Bajaj Auto promised to roll out the KTM’s bikes in India. These plans were deferred to May 2009 due to adverse market conditions.

Kawasaki Ninja, another launch planned this year, is yet to materialise. The launch of Ninja and KTM’s bikes may be significant for Bajaj Auto to hold up its image in the high-end bikes market.
Financial Performance

Notwithstanding a 20 per cent drop in sales volumes compared with last year and a 10 per cent decline in standalone net sales in the last quarter of FY-09, Bajaj Auto has managed to end the March quarter with an 8 per cent increase in net profits.

A 16 per cent decline in raw material costs, primarily on account of lower prices of steel, aluminium and rubber aided the company’s operating profits register a 9.2 per cent growth.

But for the forex loss on account of hedge contracts and expenses incurred under a voluntary retirement scheme, the net profits would have seen a 14 per cent increase compared to the previous year.

Exports have been the saving grace to Bajaj Auto’s sales numbers for 2008-09, expanding 25 per cent even as domestic sales shrank 10 per cent.

The company has recently commenced operations in its plant in China to cater to exports. This may add to its cost competitiveness.

Though the latest quarter of FY-09 ended on a slightly optimistic note, rough patches witnessed in the earlier quarter dented the annual performance.

Bajaj Auto has the headroom to benefit from softening raw material costs and exports from the Chinese plant, but its business prospects hinge mainly on how the market accepts its launches.

via BL