BAJAJ AUTO: BUY :: Business Line

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Thrust on mid-segment bikes, strong presence in three-wheelers, and sizeable export markets are positives.

The domestic auto industry isn’t out of the woods yet but there are some auto-makers who are placed better than their counterparts. Bajaj Auto is one such company. Bajaj’s sizeable export markets, diversification into the three-wheeler space and superior operating margins distinguish it from its peer, Hero MotoCorp. Launches lined up over the next few months in the mid-segment bikes, robust volume growth in three-wheelers and sanguine outlook for exports hold promise for the company’s prospects over the next one year. Besides, the 16 per cent year-to-date fall in the Bajaj Auto stock price and moderate valuations make it an attractive investment option.

At the current market price of Rs 1,803, the stock trades at 14.5 times its estimated earnings for FY14, cheaper than the average of 17-18 times seen in the past.

BETTER VOLUMES EXPECTED

Traditionally, Bajaj’s stronghold has been the premium segment bikes. In the >125cc-150 cc segment which generally sees the bulk of the premium segment sales, the company has about 45 per cent market share. But premium bikes have not been the flavour of the season in the current downturn due to their higher price points. The slowdown instead has prompted aspirants of premium bikes to settle for the middle-of-the-road category (>110cc-125cc), which offers good value for money.

In 2012-13, for example, this middle-of-the-road segment for the industry as a whole recorded a robust 26 per cent growth in domestic sales volumes over 2011-12, even as the sales of entry-level and premium bikes faltered. This trend has continued into April this year too. With launches such as the Ignitor, Hyate and Phoenix, players such as Hero, Suzuki, TVS and Honda cashed in on this trend. Bajaj missed out on this market fancy, recording a 2-3 per cent fall in sales volumes in this segment over the previous year.

DIVERSIFICATION BENEFITS

Given that the segment is proving to be a counter to the slowdown, Bajaj is now making amends. Over the next few months, the company plans to launch at least six new Discover bikes, four of which will be in this segment. With the slowdown in the industry not expected to reverse soon, these bikes could bring in the much needed volume growth for the company. Another factor that buttresses the recommendation is Bajaj’s sizeable presence in three-wheelers. Bajaj has about 42 per cent market share in the domestic three-wheeler industry with three-wheeled passenger carriers bringing in a majority of the volumes. Unlike bikes which have at best seen flat volumes, sales volumes in this segment for the industry have grown by 7-8 per cent in 2012-13 over the previous year. Bajaj’s volumes grew at a faster 15 per cent.

Dependent on the issue of fresh permits by the State government, sale of autos is independent of the cyclical movements in cars, bikes and commercial vehicles. A presence here is thus a good diversifier to the revenue base. In the months to come, the company foresees the double-digit volume growth to continue.

This will be driven by one, the availability of diesel variants, and two, the upcoming upgrade of the entire range of its three-wheelers. The latter is expected to trigger quicker replacements. It also expects permits in certain States to open up during this year. From the fourth quarter of this year, the company will begin manufacturing the quadricycle, RE60, which will open up yet another revenue stream.

A third support comes from exports. Bajaj derives about one-third of its revenues from the export of two- and three-wheelers.

The emerging economies of Africa, Latin America and Asia are the company's biggest markets. While Bajaj did have some hiccups in exports last year, it hopes to maintain the 10 per cent volume growth seen in the January-March 2013 quarter throughout 2013-14.

While it expects demand in Sri Lanka, Egypt and Nigeria to remain stable, the tie-up with Kawasaki in Indonesia and plans to enter into new markets in Africa augurs well for the company on the export front.

FINANCIALS

For the quarter ended March 2013, sluggish volumes restricted net sales growth to just 3 per cent over the same quarter last year. It stood at Rs 4,651 crore. Net profit remained almost flat at Rs 766 crore.

Although Bajaj’s operating margin still remains the best in the industry, it dropped from 19.7 per cent in the March 2012 quarter to 17.6 per cent now. Despite raw material cost pressures cooling off, lower volumes, high staff costs and other expenses (power, fuel, transportation and so on) affected margins.