About a year ago if one spoke to analysts tracking Bajaj Auto the advice was clear: Do not touch the scrip. Analysts were not too enthused about the prospects of the company. But the situation is differnet today, and the recommendation has changed gradually from sell to a hold and is now a strong buy. The renewed confidence in the company is evident from the way the stock has performed over the past six months. Though the scrip has come down from Rs 607 in January 1998 to currently quote at Rs 556, this is in line with the general fall in the Sensex which has lost about 8.27 per cent during the same period.
What is the reason for the current enthusiasm about the prospects of the company? According to Bharat Parekh, senior research analyst, Prabhudas Lilladher, "Bajaj Auto has always been perceived as a production company rather than a marketing one which would anticipate the needs of customers and develops products accordingly. However, now the company's new product pipeline is filled with radically different and contemporary products that are clearly positioned." The continuous flow of new products expected over the next year, according to him is likely to upgrade the competitive position of the company's product portfolio and improve sentiment on the scrip.
The Bajaj battle plan
Bajaj's woes began in November 1996 when sales volume began to drop and its market share came under pressure, as a result of the slowdown in mass-market scooters which is its main market. Apart from this the company was also losing out in the shift in the trend towards premium products. LML and Hero Honda its two wheeler competitors gained ground as their products are perceived as being more aesthetic and driveable. But Bajaj now seems to be getting its act together. As Mitali Ghosh, assistant vice president, DSP Merrill Lynch avers, "To counter competition the company is finally making headway in new product introductions with a greater thrust towards introducing products in the faster growing premium segment." One of the first launches was the Classic SL in September 1997 which went national around April 1998. This model has shown strong volume growth since its launch and is currently selling at an incremental 10,000-12,000 units per month.
While Classic SL is just the precursor, over the next two years Bajaj has lined up about 10 new products across all segments of the two and three wheeler market. The company's strategy is to have a product to suit every need (see table: Product Positioning). While the Classic SL and its Chetak and Super will cover the range in scooters. In motorcycles too, Bajaj will be represented in almost every segment starting from the low end M-80 to the stylish and high powered 110cc Mercury and the upmarket Eliminator slated for a launch next year. The important thing is that Bajaj is not only introducing new products but also improving technology and style.
Having a varied product range may provide an edge which in itself may not be enough in a highly competitive environment. A greater emphasis is needed on after sales service and dealer development. On this front too, Bajaj is taking rapid strides. The company has about 380 dealers, 1,200 official servicing points and a network of over 5,000 trained and certified mechanics. It is now concentrating on improving the quality of after sales service, with the new marketing theme being 'sales through service'.
Bajaj is working on modernising workshops with dealers in order to increase productivity and reduce servicing time. According to Ghosh, "This is likely to encourage customers to arrive at authorised workshops and service centres, where they are ensured good service, genuine parts, instead of going to small mechanics. As a result, after sales service, which was largely treated as a cost-centre is now becoming a profit centre." The company has also been working with dealers to help maximise their returns through better selling strategies. Dealer conferences are also being held to exchange ideas on successful selling strategies and identifying areas of improvement.
Analysts attribute the invigorated and focused Bajaj to the new management team added over the past few years. With Rajiv Bajaj in charge of product development, the company has been focusing on in house R&D and has also gained assistance from various international design houses like Tokyo R&D, Cagiva and Kawasaki to support its own R&D. Another significant addition to the team is R L Ravichandran as head of marketing. Ravichandran formerly headed the marketing division of TVS Suzuki and was responsible for the company's turnaround in 1994. His inclusion is expected to give Bajaj's products a clear positioning like he did at TVS Suzuki.
Competition
While Bajaj may be getting its act together the competition is not bound to sit idle. With most players also having new products lined up, a possibility of some product failures cannot be ruled out. However the company's thrust towards product development and assistance from international players like Kawasaki will help. Further, the pricing power that Bajaj enjoys coupled with its wide servicing network is also a plus. Another significant advantage Bajaj has is its ability to extend consumer finance. It is the only two wheeler manufacturer to have a consumer financing associate - Bajaj Auto Finance. The company can leverage its adequate cash surpluses to provide subsidised funds to its auto finance associate.
The recent budget has also given Bajaj an advantage with the petrol price hike likely to fuel demand for 4-stroke fuel efficient bikes. Bajaj could stand to gain as it has the most fuel efficient 4-stroke bike. The company will also enjoy a higher pricing power as LML and Hero Honda are likely to be affected by the 8 per cent countervailing duty as these companies have a higher import content. Bajaj's recent launch the 4-stroke 111cc Caliber will start with an import content of just 8 per cent. All these factors could see the company gaining market share in the future.
Recovering lost ground
Bajaj's results in 1997-98 have in a way come as a surprise. The market expected the company to post a negative growth just like in the first half but a recovery in the two wheeler industry in the second half enabled it to post a marginal 1.11 per cent growth in sales to Rs 3280.42 crore. Net profit grew by 5.5 per cent to Rs 464 crore from Rs 440 crore in 1996-97. Bajaj's overall market share in the two and three wheeler market during the year dipped from 44 per cent to 40 per cent. Though the company has conceded some market share it has begun the current year on a strong note which should see it gaining market share.
Until May 1998, Bajaj's sales volume had picked up appreciably. On a year-to-year basis, volumes were up 9.1 per cent while on a month-to-month basis Bajaj has registered a sales growth of 14.8 per cent. Though all segments have shown a good growth, the peak performer is the scooterette Sunny Zip whose sales have grown 86 per cent over last year.
The effect of the launch of some new products and upgrades have already started showing, but with quite a few product to be launched this year, Bajaj is in for better times. The launch of Boxer and Caliber in the motorcycle segment itself are expected to drive volumes in this segment by 37 per cent in 1998-99. According to Ghosh the company is expected to achieve a compound annual growth rate of 16 per cent in its EPS over two years. In 1998-99, she expects Bajaj to achieve sales of Rs 3698.9 crore and a net profit of Rs 530.2 crore. Considering all these factors Bajaj Auto is worth having in one's portfolio - it is bound to pay off in the long run.
