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Bajaj Auto: Will efforts pay off? - Views on News from Equitymaster
 
 
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  • Apr 17, 2001

    Bajaj Auto: Will efforts pay off?

    Bajaj Auto Ltd (BAL), a leading manufacturer of two wheelers has been faced with a couple of issues over the past year. The main being declining volumes in the scooter market coupled with the fact its margins have been hit in FY01E, due to higher costs related to its motorcycles division.

    In FY01, Bajaj Auto's market share in the geared scooter market was 73.3%. However its volumes in this segment declined to 435,667 scooters, a fall of 41% YoY. The company has two options in front of it for its scooter division. Either Bajaj Auto revives demand for this market or bids it adieu. The company has opted for the former. As a result the company has got aggressive and has come out with a stripped down version of its two-stroke scooter. On a month on month (MoM) basis, scooter segment has shown some improvement in volume terms. In March 2001, BAL sold 42,585 scooters as compared to 36,202 scooters in February 2001 and 33,889 scooters in January 2001. This MoM improvement is encouraging, however it is important to watch whether this trend continues over the next few months.

    The company has realised that it lost out to motorcycles partly due to its own pricing policy. The difference between its mid ranged scooter and its reasonably priced Boxer motorcycle was only Rs 6,000-7,000. Hence now with its focus on a variety of stripped down versions, which would be more inexpensive, it is targetting first time users who have never owned any kind of vehicle earlier.

    Though it seems that there would be a large market for scooters considering that this is a growing economy, the company's strategy on this front has yet to show the much desired results.

    On the other hand, the company is also concentrating on cutting costs across the board to increase its languishing margins. It is now in the process of developing certain parts for its motorcycles indigenously, rather than importing them. This will help the company improve its motorcycle margins.

    Besides the company has launched its new model "Eliminator" in the premium range of the motorcycle segment, so as to improve its margins from this segment.

    Volumes FY01 FY00 % change
    Scooters 435,667 739,916 -41%
    Sunny/Spirit 75,594 69,335 9%
    Step thrus 120,589 176,194 -32%
    Japanese Motorcycles 421,997 255,176 65%
    Three-Wheelers 155,170 171,977 -10%
    Total 1,209,017 1,412,598 -14%

    However its not certain that to what extent the company will succeed on this front too as in FY2002 the company is going to face higher competition in the motorcycle segment with the entry of other players like Kinetic and LML. Besides the threat of cheaper Chinese imports is also going to put pressure on price increases in this segment.

    Atleast BAL is making some efforts towards improving its volumes and revenues from both its divisions. The scooter volumes in FY01 accounted for 36% of BAL's total volumes, as compared to 35% contributed by its motorcycles. The fact remains that margins in the scooter segment are higher and could turnaround the fortunes of the company. However the one big questions mark remains. Will BAL succeed in reviving this dying market, considering that consumer preferences have shifted?

    On the current price of Rs 248, BAL is trading at 5.9x FY02E EPS of Rs 42.4.

     

     

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