Bajaj Auto – Competition heating up: RBS

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Bajaj Auto – Competition heating up


Sharp market share losses in domestic two-wheelers and the high base effect in three-wheelers
should make profit growth difficult in the coming quarters. We cut our EPS forecasts 3-5% for
FY11-12 and downgrade to Sell, as we expect competition to heat up in both segments post the
Hero-Honda JV split.
Sharp loss of market share in domestic two-wheelers
The Indian consumer’s new-product euphoria for Bajaj seems to be losing steam as its market
share in two-wheelers fell 230bp in 3Q vs a 900bp gain from March-09 to September-10. In this
period, leader Hero Honda overcame vendor supply constraints, grabbing market share from the
rest of the players. This market share shift is likely to have a bearing on pricing power, given that
we forecast just 10% sector growth in FY12. In our view, key to Bajaj’s medium-term growth in
two-wheelers are a new product launch due in April and export volumes in FY12 (with the
company likely to give guidance on this in February). We take a cautious stance and downgrade
our sales volume 5% for both FY11F and FY12F. We see large investments by Hero & Honda in
the sector, increasing competition and weakening domestic positioning in the medium term as a
result of the recent Hero-Honda JV separation.  

High base effect for the highly profitable three-wheelers a potential challenge in FY12
Scrapping of permits for three-wheelers by the state of Tamil Nadu in 2Q brought forward buying,
leading to sharp 40% volume growth for the industry in the quarter up to October, but growth
since them seems to have lost steam. We trim our EPS by 3-5% for FY11F-12F as high returns
may be unsustainable in the medium term with increased competition in the segment from
Piaggio, Mahindra & Mahindra and TVS Motor.

Rising fuel prices and interest rates favour entry-level bikes; downgrade to Sell
Rising petrol prices favour demand for fuel-efficient entry-level bikes rather than premium bikes.
Although a favourable employment scenario in IT augurs well for premium bikes, we believe
increasing competition from global motorcycle majors will squeeze profitability. With the highbase effect, we think our earlier forecasts now look overoptimistic, as EPS growth will likely be a
muted 8% for FY12F. We cut our target PE to 12x to arrive at a Rs1,103.60 target price and
downgrade to Sell (from Hold). We believe the upside risks are strong FY12 export guidance and
the new product’s success.