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Bajaj Auto: Analyst meet extracts
Jun 2, 2005

Bajaj Auto, the second largest two-wheeler player had announced its results for FY05 on May 11, 2005. To give a further insight on the future outlook, the management held an analyst meet, the extracts of which are detailed below. What is company’s business?
Bajaj Auto Limited (BAL), with a market share of 27% (last year 23%) is the second largest player in the two-wheeler industry. The company's sales mix (in volume terms) consists of 79% (last year 67%) motorcycles, 12% (15%) three-wheelers and the rest 8% (18%) from step-thrus, ungeared scooters and geared scooters. Though BAL has traditionally been a key player in the geared scooter segment, aggressive pricing coupled with a slew of new launches has resulted in increasing market share in the motorcycle segment from 16% in FY00 to 27% in FY05. It has also entered into an agreement with Kawasaki for export of motorcycles for emerging markets.

Expected outlook for 2005-06:  The management expects a growth of 15% in volumes for the industry in the coming year that will be led by the entry and the premium segment. The management has set a target of achieving a growth rate that is twice the industry growth rate.

Three-wheelers:  Accepting that its three-wheelers, with regard to the market dynamics, does not match the two-wheelers in terms of quality, the management indicated that they are working to produce a quality three-wheeler, which might take 2 to 3 years.

The company attributed the lack of growth in the three-wheeler segment to restriction imposed by the government on issuance of new permits in respect of three-wheelers and also the Tsunami tragedy. The same situation is expected to continue in FY06. In order to mitigate the same, the company is exploring some South East Asian countries for exports of three-wheelers. As the company has approximately 90% of the market share, issuance of new permits, as and when it comes, is likely to benefit the company.

Scooters:  The management has adopted a strategy to shift their focus towards the manufacturing two-wheelers that yield rewards. Accepting that the company has become virtually non-existent in the segment (from a market share of 62% in FY99 to 16% in FY05), the management however has plans to launch new scooters next year, which may enable it to capture some lost ground. Till such new launches, the primary focus will be motorcycles.

Four wheelers:  Reiterating its intention to manufacture four wheelers, the management stated that it would take atleast 3 years to make the same. The four wheeler is unlikely to be a car, but a vehicle that will be used to transport goods and passengers.

Tata Motor’s new launch ‘ACE’:  The management clarified that the launch of ACE will have no impact on the three-wheeler sales of the company, as it is largely present in the lower end of the market (in terms of tonnage).

Exports:  Exports contributed 11% to FY05 revenues. The company has aimed at increasing this share to around 20% over the next few years. The management is concentrating on the South East Asian countries to achieve its exports target. The management has clarified that it will enter these markets either by itself or in association with a local partner.

Avenger:  The company is planning to introduce a new bike called ‘Avenger’, fitted with ‘Pulsar’ engine. The management did not deny of some cannibalization as a result of the launch of the new bike. The company is aiming a combined (Pulsar plus Avenger) sales of 35,000 units per month. In the first two months of FY06, company has managed to sell about 30,000 units of Pulsar on an average.

Change in trend toward 125cc bikes as against 100cc bikes:  The management opined that the main reason for this change is more as a result of the fact that the value proposition found by the customer in 125cc bikes is greater than the commensurate increase in the price, rather than mere increase in the disposable income in the hands of the consumers. The management expressed confidence that its 100cc offering (CT 100) will continue to drive volumes owing to its value proposition and expects to clock about 1 lac average volume sales per month in this segment.

Kawasaki Joint Venture:  The management clarified there will be no clash of interest on account of its tie-up with Kawasaki, as the same is in the higher end of the motorcycles market, whereas Bajaj has its strengths in manufacturing mass market motorcycles.

Insurance venture with Alliance:  The management stated that both the insurance companies (Life and General Insurance) are leaders (ranked at 2nd position) in the market. The general insurance business, which generally requires 5 to 6 years to break even, had broken even in FY04 (in 3 years) and recorded a profit FY05.

In case of Life insurance business, the break-even is generally 8 to 10 years, but the company aims to do so in 5 years. (i.e. three years from now).

Surplus cash:  It should be noted that traditionally the company has had significant amount of cash plus liquid investments in its books. On enquiring about the same, the management regarded the excess surplus as a cushion against competition especially in the international markets and not merely as means to earn other income. The company has a negligible presence in the overseas market, which is dominated by global majors.

Chakan Plant:  The management is incurring capital cost to increase its production capacity at Chakan, Pune. The management clarified that the amount of investment required is not substantial (about Rs 200 m to Rs 400 m), as the plant is one of the leanest, where most of the requirements are outsourced. With the capital cost, the productivity is expected to rise from 1,600 units per man-day to 2,400 units per man-day.

Impact of steel price:  As per management, Rs 1,000 rise in cost of steel per tonne results in increase of Rs 43 per motorcycle and Rs 100 per three-wheeler. In a bid to cushion itself against strengthening commodity prices, the company entered into a long-term contract with TISCO for its steel requirements, which caters to 65% of the requirements. The said contract expires in September 2005.

With the recent weakness in the global steel market, the domestic companies too, have pruned steel prices by about Rs 500 to Rs 2,000 per tonne. So if this trend continues, it is likely to help the company in pruning its costs, and becoming more competitive.

What to expect?
At Rs 1,260, the stock is trading at price to earnings multiple of 13.2 times its FY06 earnings. While we expect the company to outperform the industry growth in the motorcycle segment, the fall in the scooters segment is hampering its overall growth. As the major initiative from the company in the scooter segment is expected only next year, we do not expect the company to do well in the current year in scooter segment. However, its thrust on exports and employee rationalization together with huge cash balance enables the company to be in a better position to withstand the competition.

Further the introduction of VAT in Maharashtra, can act as a facilitator in improving the competitiveness. It should be noted that the company was at a disadvantage as compared to Hero Honda, as the latter was enjoying the benefit of the same (owing to its plant in Haryana) since last two years. This coupled with signs of falling steel prices, can enable the company to improve its margins. The stock continues to be our preferred player in the two-wheeler segment and we re-iterate our BUY view on the stock with a target price of Rs 1,550 over next couple of years.

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