Bajaj Auto

Bajaj Auto has put up a strong show in the quarter ended December 2010 despite rising input costs and interest rate hikes that would have a bearing on sales.

This performance has been aided by good volumes, greater realisations and superior margins. We reiterate a buy at the current market price of Rs 1311. At this level, the stock trades at PE of 15 times its trailing twelve month earnings and 13 times its estimated earnings for FY12.



High on profitability

The auto industry has been witnessing robust growth for more than a year now and Bajaj has been no exception. For the first nine months of the year, the company clocked a 45 per cent year-on-year growth in net sales to Rs 11,946 crore and 51 per cent growth in adjusted net profits to Rs 1,939 crore.
But where the company scores over competitors such as Hero Honda and TVS is in its ability to hold on to operating margins. Spiralling commodity prices have been pressuring margins in the industry and, at such times, Bajaj has been able to comfortably maintain about 20 per cent EBITDA margins.

Bajaj Auto's ability to hold on to profit margins stems from three factors. One, its strong brands in mid-to-premium motorcycles. Thanks to this strategy, margins are much better than those of competitors in domestic motorcycles, from which division the company derives 55 per cent of its revenues.

Two, a good hold on the three-wheelers market. It derives 11 per cent of its revenues from three-wheeler sales where margins are in excess of 30 per cent. Three, about 28 per cent of Bajaj's revenues come from exports, where margins are higher than 20 per cent. The premium focus and presence in three wheelers has meant that the company has enjoyed good pricing power and has been able to pass on a major portion of cost hikes to customers through periodic price increases, the latest being in January 2011. On the net margin front too, the company will gain from the enhanced utilisation of the Pantnagar (Uttarakhand) plant which enjoys tax sops.

Discover and Pulsar

The story of Bajaj's revival after the slowdown of 2008 is well known. Its adoption of a brand-centric strategy, focusing on the differentiation and positioning of the Discover and Pulsar brands has reflected on the company's robust volumes. This is because the repositioning helped the company cater to the aspirational ‘middle of the market' segment between executive and premium bikes as also the entry and executive bikes. Priced at attractive points between two segments, bikes such as the Discover 100 and 150cc and the new Pulsar 135,150, 180 and 220 cc have helped the company's domestic two-wheeler sales grow by a robust 45 per cent for the nine months ended December 2010. Bigger and sportier bikes such as Discover and Pulsar now contribute over 70 per cent of the company's total motorcycle sales.

The company expects to achieve a 34 per cent market share in the motorcycles segment by the end of the fiscal from about 24 per cent in 2009-10. Going forward, some moderation may be expected due to base effect and increasing interest rates. Yet, this focus on the twin brands of Discover and Pulsar will keep the momentum on the volumes front going.

Over the long term, the company will benefit from its alliance with Austria-based KTM Power Sports. Bajaj, which has a 38.09 per cent stake in KTM, will gain in terms of access to technology as also the European markets. The first of the co-developed products, KTM Duke 125, will hit Europe in 2011. This product will also be available in India.

Support from three-wheelers

The company has a 48 per cent market share in passenger carriers. Its presence in the goods carrier segment is limited to 11 per cent. But the company also recognises that four-wheeled LCVs such as the Ace, Ape and Maxximo pose stiff competition to its three-wheeled cargo carriers.

To mitigate this, it has embarked on a brand-building exercise for its three-wheeler portfolio under the ‘RE' brand. This product line could have five platforms. Also, RE passenger carriers are expected to help the company regain its 50 per cent market share in that space. Few ‘RE' vehicles have already been launched.

Over the longer-term, the company expects a structural shift in the domestic passenger three-wheeler segment, with four-wheelers replacing them. Hence, one of the five RE platforms is said to be four-wheeled. Incidentally, the company is also working on a low-cost car which is scheduled to be launched in mid-2012.

Diversified export base

A third scoring point for the company is its strong export sales coupled with a diversified export base. For the nine months ended December 2010, two- and three-wheeler exports grew by 34 per cent and 54 per cent respectively. The company exports as many three-wheelers (predominantly passenger carriers) as it sells domestically.

Export demand has come from the four-stroke three-wheelers for which capacity constraints are to be eased by March 2011. What bodes well for volume growth is the focus on under-penetrated markets. While Africa and South Asia contribute about 35-40 per cent each, Latin America and South-East Asia bring in 18 per cent and 8 per cent of export revenues

via BL