Bajaj Auto - Riding Towards Darkness

Ali On Content / 20 Dec 2011

Bajaj Auto, the second-largest manufacturer of two wheelers in India, reported less growth compared to its peers and its production constrains, decreasing brand image, market acceptance, detoriating quality and inability to achieve target sale stock looks struggling. It’s not far that within six months Bajaj will downgrade to fourth position from its second position in two-wheeler, giving its way to Honda and TVS. For Nov 2010, total sales for Bajaj Auto dropped 20 per cent to 2.99 lakh units compared to 3.70 lakh units sold last month in October. Its two-wheeler sales decreased from 3.30 lakh in Oct 2010 to 2.65 lakh in Nov 10. Export sales also dropped monthly as well as yearly.

Fierce Competition
Honda, newly emerged in the market is presently producing 1.4 lakh/month. It is further increasing its capacity. Suzuki is in the process of doubling its capacity. Hero Honda, the market leader, is increasing capacity by 2000 per day. TVS is increasing its production capacity too. Mahindra has newly entered two- and three-wheeler market. It is vigorously making a mark in this new segment with its strong rural hold. They are coming up with a capacity of 70,000 per month soon. Bajaj is not in any process of increasing its capacity. It is not introducing any of its new variant as well. In three-wheeler, Mahindra & Mahindra, Piaggio, TVS are capturing the market firmly. TVS is doubling its capacity for three-wheelers. Italy-based Piaggio is increasing its capacity to 40,000 per month. This fierce competition in two- and threewheeler sector is affecting Bajaj’s survival in industry.

Market Research On Auto Sector

According to market research, the most preferred brand of two-wheelers is Honda, followed by Hero Honda, TVS and then Bajaj. Bajaj Auto’s market share has been decreasing from 35 per cent in 2006 to 17.5 per cent in Nov 2010. The increasing expansion of competitors, unsatisfactory quality of product and negligible marketing promotion strategy of Bajaj with decreasing market share signifies its downfall.
On the domestic front, Bajaj Auto sold 1.75 lakh units of two-wheelers. Consolidating the overall two-wheelers sold in Nov 2010 by all the players, we can sum upto 10 lakh units have been sold in India (Hero Honda - 421366, Bajaj - 175000, TVS - 139541, Honda - 129627, Suzuki - 25439, Yamaha - 22710, Mahindra - 15854, Others like LML, Kinetic, YObykes - 70000). This signifies the market share of Bajaj to be 17.5 per cent. Bajaj held market share of 35 per cent in 2006. Picturing the current scenario, it is further expected to fall to 15 per cent in the next six months and less than 10 per cent in two years. 
Bajaj Auto dealers say Bajaj is increasing inventory with its dealers and distributors. Thus, the sales recorded by Bajaj in the last five months are not consumer sale but the inventory sale of dealers and distributors. Hero Honda and Honda have waiting period ranging from 2-8 months whereas Bajaj’s bikes are overstocked with the dealers. Acceptance of Bajaj in market has gone for a toss. Dealers have reported dissatisfaction for Bajaj.

OPM Pressures
Input costs have increased recently following the spurt in steel, rubber and aluminum prices. Thus, margins of Auto universe are expected to contract sequentially to reflect higher input costs. This will result in very high operating margin pressure.

Valuation

Considering the scrip is currently trading at a PE of 23.78x, which is very high, the scrip is available at the premium; hence we advise to stay away from this counter. The leader in this segment Hero Honda is a better performer with increasing market share in last one year. Its share price rose by 15 per cent, whereas Bajaj’s share price rose by 300 per cent in last one year, i.e. Bajaj Auto has only operated base not fundamental. Two years back, Bajaj was trading at share price 300. On November 3, 2010, the stock touched 3200, i.e. more than 1000 per cent increase in price. This is not fundamentally or technically justified. Fundamentally, Bajaj is losing its ground by decreasing market share.

Thus, studying the fundamental and technical aspects of Bajaj Auto, it is trading at its highest level and we recommend a STRONG SELL on Bajaj Auto at CMP 1470 with target it falling down to 1180 soon.

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