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Bajaj Auto: Falling short of peers - Views on News from Equitymaster
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  • 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.



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