Best-in-class margins, a strong portfolio in mid to premium bikes and robust outlook for exports make Bajaj Auto a superior bet in the two-wheeler space.

At 14 times its estimated FY12 earnings, the stock is currently available at a discount to Hero Honda (16 times FY12 earnings), presenting a good opportunity to buy. Investors with a perspective of one to two years can buy the Bajaj Auto stock (Rs 1,447). For the quarter ended June 2011, net sales grew by 23 per cent to Rs 4,777 crore and net profit by 20 per cent to Rs 711 crore. Cost pressures in the first quarter brought the company's operating margins down to about 19.1 per cent from around 20 per cent throughout last year, but margins were stronger than peers. This has been possible due to the company's product mix tilted towards the more profitable commuter deluxe (Discover) and sports (Pulsar) segment bikes, three-wheelers and exports.

Going forward, an expected slowdown in volume growth may pose a risk. But the company appears well-placed to sail over this bump. Although the domestic auto industry volume growth has moderated to 15 per cent in the first quarter, two-wheelers grew faster than the industry at 17 per cent. Bajaj Auto too has seen a healthy 24 per cent growth in the 125-250cc segment bikes, in which it is the market leader. The recently launched Discover 125cc, the soon-to-be introduced Boxer 150cc and the upcoming Pulsar variants will keep the momentum going on the volume front. Besides, domestic three-wheeler sales, in which the company has about 85 per cent market share in the passenger carriers segment, will also receive a leg up, thanks to the opening up of permits in Karnataka for about 45,000 vehicles. The company expects a few other States to follow suit.

Thirdly, on the export front, Bajaj sees a huge potential for improving its market share in Africa, given the under-penetrated nature of the market there. Export of bikes and three-wheelers to Africa, which bring in 20 per cent plus margins, currently constitute 45 per cent of the total exports of the company. Bajaj Auto also intends to increase prices in the export markets in August.

The near-term challenge to export earnings comes from the impending withdrawal of the DEPB incentive scheme. Considering its pricing power in key export markets like Africa, the company intends to pass on the increase in costs to its distributors and customers. However, the risk remains of a decline in demand due to higher prices or an inability to pass on the cost increase in full or part.

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