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Bajaj Auto: Is it unshakable? - Views on News from Equitymaster
 
 
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  • Dec 29, 2001

    Bajaj Auto: Is it unshakable?

    The theme of the management discussion and analysis of this company for the year 2000 and 2001 was ‘Change’. Not surprising, as this company learned the costs of complacency in the hard way. Though the company’s performance in the current fiscal is impressive, the doubt in everyone’s mind is will Bajaj Auto be able to pull up its socks and stay focused in the two-wheeler industry, which is supposed to be its forte?

    Bajaj Auto Ltd (BAL) is the country's largest manufacturer of two wheelers with a capacity of 2.3 m vehicles. It has a presence in all two-wheeler segments viz. scooters (geared and ungeared), motorcycles and step thrus. The company sold 1.2 m units in FY01 and that constitutes around 32% of the Indian two-wheeler industry. It has been the market leader in the geared scooter segment and in FY01, its market share stood at 78%.

        Bajaj's market share…
    Segment FY00 FY01
    Industry 37.5% 32.2%
    Motorcycles 16.8% 19.6%
    Geared scooters 72.0% 78.0%
    Ungeared scooters 18.3% 18.5%
    Three-wheelers 72.0% 73.0%

    But the performance of the company over the last three years has been far from impressive. Consistent fall in scooter sales over the last five years has had a significant impact on profitability of the company. Due a 38% fall in geared scooter sales and a 29% contraction in overall scooter segment, BAL’s sales fell by 2.3% to Rs 30,259 m in FY01. Change in consumer preference towards motorcycles, pricing strategy followed by competitors and sales tax rationalisation resulted in weak demand for scooters. Thus the division’s contribution to sales has come down from 41.5% in FY99 to 23.2% in FY01 for BAL.

    BAL's sales mix…
    (% of sales) FY99 FY00 FY01
    Scooters 41.5% 37.3% 23.2%
    Motorcycles 18.9% 22.6% 35.6%
    Step-thrus 8.7% 8.3% 6.3%
    Scooterettes 1.8% 3.4% 4.6%
    Three wheelers 23.8% 23.2% 24.5%
    Spare parts 5.3% 5.2% 5.8%
    Total 100.0% 100.0% 100.0%

    Though the company has plans to stem the fall through new product introductions under its flagship brand ‘Chetak’ and ‘Super’, it is for sure that scooters, as available in the domestic market currently, have lost their sheen. Having said that Honda’s ‘Activa’, thanks to its successful positioning and superior technology, has performed extremely well and the Japanese giant has cornered around 2% market share within six months of launch. Hitherto Bajaj Auto had only one major competitor in the scooter segment i.e. LML. But now, with the entry of a formidable international giant in the form of Honda, Bajaj Auto has to spruce up its act to maintain market share. Although BAL has an upper hand in terms of distribution and after sales service networks, it will not take time for Honda to expand its presence in key regions, say western India that accounts for a sizable chunk of the industry volumes.

    The shift in consumer preference for motorcycles over scooters has resulted in BAL stepping up its capacity for motorcycles and becoming aggressive in this segment. BAL has launched a slew of new products in the motorcycle segment, as a result of which, its market share has gone up significantly. In FY01 BAL sold 422,016 motorcycles representing a 40% jump in absolute terms. Caliber and Boxer accounted for as high as 97% of the motorcycle volumes with Boxer alone accounting for 61% of motorcycle sales in FY01. The overall market share of the company stood at 21% in FY01.

    (Rs m) 2QFY01 2QFY02 Change
    Sales 8,299 9,298 12.0%
    Other Income 720 1,037 44.0%
    Expenditure 7,746 7,958 2.7%
    Operating Profit (EBDIT) 554 1,339 141.9%
    Operating Profit Margin (%) 6.7% 14.4%  
    Interest 13 11 -12.5%
    Depreciation 422 446 5.7%
    Profit before Tax 839 1,920 128.7%
    Extraordinary item (195) (39) -79.8%
    Tax 30 460  
    Profit after Tax/(Loss) 614 1,420 131.2%
    Net profit margin (%) 7.4% 15.3%  
    No. of Shares (eoy) (m) 119.4 101.2  
    Diluted number of shares 101.2 101.2  
    Earnings per share (Rs)* 24.3 56.1  
    (*annualised)      

    In an attempt to boost growth and increase market share, it has already launched ‘Caliber Croma’ and ‘Aspire’ in the first half of the current year. ‘Pulsar’ was the most recent introduction from Bajaj’s stable and BAL has indigenously developed this model without technical assistance from its collaborator, Kawasaki. Going forward, keeping in mind the aggressive stance of the company, one could expect a consistent rise in contribution from this division.

    Apart from two-wheelers, BAL also has a commanding market share of 73% in the three-wheeler segment. Though volume growth has been lacklustre in the three-wheeler segment, stringent pollution norms are expected to boost CNG based vehicle demand in the coming years. Following the National Capital Region’s (NCR) decision to grant fresh licenses for CNG based vehicles, all other major metros are expected to follow suit. As a market leader, BAL is well poised to capitalize on this if demand picks up.

    BAL hopes to improve on margins in the current year through value engineering and implementation of total productive maintanence. In FY01, the company introduced a voluntary retirement scheme (VRS) for which 2,017 employees opted for. These initiatives have yielded positive results in the first half. For instance, staff costs fell by 14.8% to Rs 533 m in 2QFY02 resulting in a sharp rise in operating profits by 141.9%.

    But all is not rosy for the company. Competition has intensified in the motorcycle segment with more than six players vying to gain market share. Bajaj’s pricing strategy, though aggressive, is not sustainable for a long time. Hero Honda has plans to bring down prices of its top selling motorcycle ‘Splendor’ by Rs 4,000 odd through its value engineering effort. If that were to happen, given the brand equity that Hero Honda enjoys amongst customers, BAL’s market share might be tested. The cost saving initiatives of BAL could be negated on account of higher advertisement, promotional and distribution expenses involved new models.

    The other major concern looming over BAL is the way surplus cash is being utilised. The company’s exposure to stock markets (in 'other quoted' companies, excluding listed trade related companies) is marginally over Rs 6 bn, which is 54% of their total investment portfolio. This is worrying and what’s more it has been on the rise over the last three years as shown in the table below. Though BAL managed to make profits in stocks like GTL Ltd, HFCL, Shyam Telecom and Vikas WSP in FY01, this might not be the case going forward in light of the volatility we have been witnessing on the bourses off late. Having said that, BAL did announce a buy-back plan in FY01 and bought back 18 m share at Rs 400 per share.

    Concerning cash deployment…
    (% of total surplus funds) FY99 FY00 FY01
    Mutual funds 10.2% 10.3% 7.5%
    Fixed income securities 76.6% 64.0% 52.4%
    Equity shares 13.2% 25.7% 40.1%
    Total 100.0% 100.0% 100.0%
    Total surplus funds (Rs m) 20,897 24,811 16,557

    More recently, BAL has also ventured into life and non-life insurance with an Rs 2.6 bn investment in partnership with Allianz of Germany. The payback period for life insurance business generally is around six years and given the competitive nature of the insurance industry at present, the pay back period might be prolonged. Also BAL has to spruce up its research and development activities in order to sustain leadership in the two-wheeler market. Going forward, there is no room for complacency and unless BAL remains focused in its core business, its ‘Caliber’ could be tested.

     

     

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