Feb 24, 2004|
Bajaj Auto: Falling short of peers
In the last few months, Bajaj Auto has been on the decline. To be precise, the stock has fallen almost 25% since the end of December 2003. What has triggered this fall considering the fact that long-term prospects of the two-wheeler sector are still promising? Consider this graph first. Rs 100 invested in Bajaj Auto, Hero Honda and TVS a year ago is now worth Rs 166, Rs 244 and Rs 197 respectively.
Obviously, one year is too short-term in the stock market. If one were to extend the period of analysis to more than three years, Bajaj Auto and TVS have outperformed Hero Honda by a significant margin. The reason is simple. Bajaj Auto and TVS have seen more than 40% CAGR in motorcycle volumes over the last three years as compared to 27% for Hero Honda, which means the once dominant Hero Honda was losing market share due to stiff competition. As a result, the company underperformed on the stock market.
Bajaj Auto, which was once highly reliant on geared scooters for growth (57% of volumes sold in FY99), has managed to alter the sales mix dramatically in the last five years. Motorcycle segment, which is one of the fastest growing in the two-wheeler sector, contributed to 60% of volume sales in FY03. While the company managed to grow volumes rapidly over the last five years, stock markets were expecting the momentum to continue. Besides, over the long term, the company has ambitious plans for international markets as well, which also enthused stock markets.
However, what was overlooked was the fact that penetration has improved significantly in the urban and semi-urban markets where there has been a large-scale shift from geared scooters to motorcycles. Secondly, the motorcycle segment is increasingly becoming fragmented with more players launching new models every three months. Thirdly, Bajaj Auto has presence in segments like geared scooters and mopeds where volumes are hard to come by and as a result, continue to remain a drag on overall volume growth and margins.
More importantly, on a peer valuation basis, the stock was trading at a relatively higher P/E multiple as compared to Hero Honda and TVS despite poor return ratios. Also, the company's operating margins were comparable with that of other players. Therefore, the premium valuation was justified only if volume growth continued at a healthy rate. Here, the company failed to meet market expectations. For instance, Bajaj Auto posted a marginal 4% YoY growth in motorcycle volumes in December 2003 and the performance of the company in January 2004 was also not so encouraging. While one quarter is too short a period to arrive at a conclusion, we believe that valuations are relative in nature and have to justify future growth prospects.
The stock currently trades at Rs 876 implying a P/E multiple of 13.4x our FY05 estimated earnings, which is marginally higher when compared to Hero Honda. While growth opportunity for the company in the domestic and the international markets in the long term are promising, in the near term, we feel that further rise in operating margins will be hard to come by. But the three-wheeler market, especially the goods segment, is likely to witness higher growth and Bajaj Auto, as a market leader, is well poised to take advantage of the same. Overall, risks seem to outweigh positives in the near term.
More Views on News
Aug 14, 2017
Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.
Aug 2, 2017
GST realted cost impacts Margins, Management expects good year ahead.
Aug 1, 2017
Good Recovery in the Scooters market, expects pick up in exports too.
Aug 1, 2017
New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.
Jul 6, 2017
Ends the year on a Flat note. Expects good recovery in the exports market.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
TRACK BAJAJ HOLDINGS & INVSTMENT
- Track your investment in BAJAJ HOLDINGS & INVSTMENT with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
- Add To MyStocks