The Hindu Business Line : Bajaj Auto: Hold

Shareholders can continue to hold the Bajaj Auto stock. Better domestic sales volumes in the first quarter, robust export growth and planned launches in the executive segment may positively impact the near-medium term earnings.

Since May, when the stock relisted after restructuring, it has fallen by 50 per cent, due to concerns about the impact of rising interest rates on two-wheeler sales. Now, the stock trades at a discount to competitor, Hero Honda. At the current market price of Rs 460, it trades at a PE of 8 times estimated FY09 earnings vis-À-vis Hero Honda, which trades at about 12 times its estimated earnings for the same period.

The fall in market price notwithstanding, fresh exposures need not be considered now. This is because rising raw material prices and interest rates, lacklustre three-wheeler sales and a subdued outlook for the industry still pose a challenge to earnings over the next few quarters, which may cap upside on the stock.

Revival in two-wheeler volumes

Beaten by the slowdown in the auto industry due to rising interest rates and tightening of credit, Bajaj Auto’s domestic sales volumes in the two-wheelers segment for the year ended March 31, 2008 fell by 20 per cent over the previous year. This decline seems to have been arrested in the first three months of the current fiscal with two-wheeler sales volumes growing by about 2 per cent year on year. The excise duty cut announced in the budget and the effect of last year’s lower base might have aided this growth. Two-wheeler exports too brought in volumes in the first quarter, growing by a whopping 50 per cent year on year.

Shift to executive segment

Trends in motorcycle sales in the April 07-March 08 period reveal a shift in customer preferences from ‘economy’ to ‘style and sophistication’, and, hence, a fall in volumes in the ‘below 125cc’ segment vis-À-vis a rise in the executive segment volumes.

Bajaj’s sales volumes in the quarter ended June 09 shows a continuance of this trend. The company’s sales in ‘125cc and above’ category grew by 16.3 per cent while volumes in the lower segment fell by 12 per cent.

This shrinkage in volumes for the entry segment bikes will benefit the company as, one, it has a stronghold in the premium segment with its ‘Pulsar’ range of bikes and, two, it has spruced up its portfolio in the executive segment. The launch of the XCD — a 125cc bike with features of a premium bike and performance of a 125cc engine — all at entry-level prices, is a case in point. Going forward, the company plans four more launches in the 125cc category based on the XCD platform in the current year.

Besides, beginning 2010, Bajaj will also roll out bikes on two platforms — 125 cc-180 cc and 250-400 cc — through its joint venture with Austrian sports bike manufacturer, KTM. Bajaj had, earlier this year, acquired a 25 per cent stake in the company.

Exports to boost growth

Product launches may help Bajaj protect its turf in the local markets, but considering the pause in domestic sales, exports are expected to be their mainstay in the near-term. From about six lakh units in FY-08, the company expects to sell about 8.5 lakh units in the export markets in FY-09 and about 10 lakh units by FY-10. A well-diversified clientele across West and South Asia, Africa and Latin America, the tie-up with Kawasaki to distribute its products in the Asean region and plans to foray into the European markets through KTM’s network, bodes well for volume growth on this front.

First quarter performance

The company reported a 9 per cent year-on-year rise in net sales in the first quarter of FY-09 to Rs 2,340 crore. But thanks to the spiralling costs of inputs such as steel and lacklustre sales in the three-wheeler segment, operating margins slid to 11.5 per cent vis-À-vis 13.4 per cent in the same quarter last year. This is also the predominant reason for the fall in net profits, which decreased about 4 per cent to Rs 175 crore.

Concerns

While a changed product mix focusing on the executive segment will improve realisations and margins, spiralling raw material prices and price wars with competitors may undermine margins.

Besides, the upcoming LCV (light commercial vehicle) and the small car may face stiff competition due to the array of choices in the market. The latter may also pose challenges on the cost management front in the next two-three years.

More Stories on : Two/Three Wheelers | Stocks | Recommendation | Bajaj Auto Ltd

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