Bajaj Auto in top gear

An expanding product portfolio, high operating profit margins and faster than industry growth will help the company deliver better returns than its peers

Robust volume growth outlook for 2011-12, better profitability and relatively cheaper valuations should help Bajaj Auto deliver better stock returns in the next one year. After a good 34 per cent jump in overall volumes last financial year, the company expects to post a 20 per cent volume growth in the current financial year on the back of the Discover launch and strong demand. Analysts say the growth rate is good as it comes on a high base, and almost double the 11 per cent growth estimated for the two-wheeler industry.

Though analysts believe there could be some pressure on margins due to sharp rise in input costs, the company expects to beat the rising input costs through price rise (two rises already undertaken since January this year) and higher operating leverage. Although rising interest rates, higher product and fuel prices might impact domestic two-wheeler sales, analysts such as Sanket Maheshwari of ICICI Securities believes Bajaj Auto is the best placed among two-wheeler makers to tackle the situation. Auto analysts including Maheshwari believe the company does not depend significantly on mass market segments unlike other players and has a significant export presence which accounts for a third of overall volumes. Further, its high Ebdita margins make it least vulnerable to input cost spikes.
 

PROFITABILITY EDGE
FY12E in Rs crore	Bajaj Auto	Hero Honda	TVS Motors
Volumes (units)	4,588,709	5,900,000	2,280,000
Growth (%)	20.0	8.2	10.2
Net Sales	19,868	21,725	7,496
Ebidta	3,985	2,750	543
Ebidta (%)	20.1	12.7	7.2
Net profit	3,028	2,315	272
EPS Adjusted (Rs)	104.5	115.0	5.7
P/E (x)	13.9	14.6	10.6
E: Estimates                                                 Source: Companies, Bloomberg estimates

HIGHER MARGINS 

The company continues to focus on the twin-brand strategy of positioning Discover brand in the executive segment while Pulsar caters to the premium segment. The two brands contribute about 70 per cent of the motorcycle sales for the company. This product mix has helped the company maintain realisations per vehicle at the Rs 42,000 level while those for Hero Honda and TVS Motors lag behind at Rs 35,000 and Rs 32,000.

Standard Chartered analysts Amit Kasat and Aniket Mhatre believe that with 70 per cent of its portfolio in the 20 per cent plus margin category, the company is likely to maintain margins at current levels (20 per cent). However, in case of a pricing war or a further increase in raw material costs, margins could trend down to about 18-19 per cent levels, believe analysts.

DISCOVER 125 LAUNCH
With the launch of the Discover 125 priced at about Rs 45,500 towards the end of March, the company has completed its portfolio for the executive segment bikes (Rs 38,000-Rs 47,000) which includes Discover (100cc, 125cc, 150cc) and Platina (125 cc). The company expects the new bike to sell roughly 40,000 bikes a month (the two existing Discover brands currently gross just over a lakh units) which will further make inroads into the domain of the executive segment market leader, Hero Honda. The six Splendor and Passion variants of Hero Honda generate sales of roughly 3 lakh units a month.

THREE WHEELER SALES
Three wheeler sales (about 11 per cent of overall volumes) are expected to grow at over 15 per cent over the next two financial year. Antique Stock Broking analysts Ashish Nigam and Kunal Jhaveri in a recent report have said three-wheeler volumes have been strong over the last few months as several state governments have recently done away with the concept of permits which has opened up huge pent-up demand. Demand for three-wheelers in the export market has also been extremely strong, but supply hasn’t been able to keep pace on account of limited capacity of four-stroke engines. The company has completed the expansion of three wheeler capacity by 28 per cent to 45,000 units a month, which should enable it to boost sales in this category.

VALUATIONS
The stock has historically traded at a 20 per cent discount to that of Hero Honda. But Bajaj’s successful launches in the executive segment as well as the uncertainty in the Hero Honda JV have led to the bridging of the discount gap. Analysts at BRICS Research expect the Bajaj Auto stock to trade at a 16 times earnings multiple for 2011-12 (share price of Rs 1,639 for core auto business) which coupled with investments and cash per share at Rs 182 gives a target price of Rs 1,821.

Bajaj’s stock, which is up marginally over the last week on the back of the launch of its Discover 125 cc bike and steady sales for March, should fetch investors about 25 per cent return over a one year period.