BAJAJ AUTO LTD-OVERPRICED
Bajaj Auto Ltd, the2nd largest manufacturer of two-wheelers in India
, reported less growth compared to its peers and its production constrains & inability to achieve target sale stock looks struggling.Looking at the standalone figures of Bajaj Auto Ltd for the last three years, they tagged a growth of 9 percent as compared to 24 percent of Hero Honda and 17 percent of TVS Motors within the same period. Even on the consolidated front the growth figure was just 15 percent which couldn't meet the likes of TVS Motors which stands at 18 percent.
The large-cap stock has outperformed the market over the past one month till 3 September 2010, gaining 5.92% as compared to the Sensex's return of 0.59%. It had also outperformed the market in the past one quarter, rising 30.81% as compared to the Sensex's return of 7.04%.
CONFRONTING PRODUCTION DIFFICULTIES:-
A statement from the company right from the horse's mouth as a statement made by Rajiv Bajaj, MD, BAL said, "Production constraints limited sales" and he also stated that Bajaj Auto doesn't have any plans for expansion.
Bajaj Auto lost 20,000 production units in June owing to the constraint.
The commodity cycle is already been up over the last quarter and if we see even from Q1 to Q2, the company lost about Rs 100 crore to the rise in commodity prices.
Honda who has newly emerged in the market, is presently producing 1.4 lakh/month it is further increasing its capacity to produce 2 lakh/month as it is commencing its second plant in Alwar (Rajasthan). Suzuki is in the process of doubling its capacity.
Hero Honda, the market leader in this sector, is increasing capacity by 2000 per day. Currently it is producing 50 lakh per year and targeted is 56lakh per year. TVS is increasing its production capacity too.
MARKET RESEARCH ON AUTO SECTOR :-
According to market research performed on consumers, the most preferred brand of two-wheelers is Honda, followed by Hero Honda, and then Bajaj.
Bajaj Auto's market share has been decreasing from 35% in 2006 to 25% in 2010. The increasing expansion of competitors, stagnant production of Bajaj with decreasing market share signifies its downfall in auto industry.
The market share of Bajaj is further expected to fall to 21% in next 3 years.
A recent growth in auto industry was observed due to deferred demand caused by recession from 2007-2009. As this demand is getting fulfilled, the growth level has been decreasing in last 3 months.
We interacted with Bajaj Auto dealers and as they said, Bajaj Is increasing inventory with their dealers and distributors. Thus the sales recorded by Bajaj in last 5 months are not consumer sale but the inventory sale of dealers and distributors. Hero Honda & Honda has waiting period ranging from 2- 8 months whereas Bajaj's bikes are overstocked with the dealers.
IMPACT OF CHANGE IN TRENDS ON COMPANIES :-
Hero Honda market shares increase of 300bps in 3 months. Bajaj auto nearly exited out of the segment. Where in TVS Motors shares remain flat.
Increase share in rural area sales Hero Honda penetrated and huge success in splendor compared to Bajaj auto average growth. Bajaj auto to overcome the raw material cost pressure the company had raised prices of the Discover and Pulsar brands by Rs500-1,000 per unit in mid June and has also taken a price increase of approximately 2% in the exports markets compared to unchanged price rise to its peers.
OPM PRESSURES TO INCREASE SEQUENTIALLY :-
Input costs have spiraled in the last four months following the spurt in steel, rubber and aluminum prices. The cycle has reversed in the recent past, following upturn in commodity prices. Thus, Margins of our Auto universe is expected to contract sequentially by 128bp to reflect higher input costs. This will result in very high operating margin pressure.
UNION BUDGET EXPECTATION:-
The recent Union Budget 2010-11 came in for the Automobile Sector, with the government keen on increasing its tax base and the Budget hiking Excise Duty by 2% to 10% (from 8% earlier). The industry, however, expect is a duty hike of 4%.
The government's focus has logically been on investments in metro rail system for many cities, backed by grants and incentives to State transport undertakings to improve and modernize their bus fleet. More than 55 cities across India will be having Metro Train in couple of years. According to a study, a country developing its Metro Train facility undergoes a decline in automobile industry by a high percentage.
THIS SECTOR,WHICH DEPENDS ON THE OEMs FOR THE GROWTH:-
Are finding it difficult to make future projections, as two of their key markets, the OEM (Original Equipment Manufacture) and Replacement Segments, had been hit by poor demand and instability in final product prices, which are trending downwards.
SUBSIDIARIES CONTINUES TO INCUR LOSSES :-
Bajaj Auto International Holding BV (BAIH BV) During FY08, BAIH BV acquired 24.45% stake in KTM Power Sports AG of Austria and has subsequently increased its stake to 35.67% with a total investment of Euro 140mn posted net loss of Rs1,019mn in FY10.
PT Bajaj Indonesia (PT BAI) incorporation in FY07, this subsidiary has been incurring losses. In FY10, PT BAI posted loss of Rs159mn.
VALUATION:-
Considering the fact that the scrip is currently trading at a PE of 23.78x which is very high ,the scrip is available at the premium hence we advice to stay away from this counter
The leader in this segment Hero Honda is a better performer with increasing market share in last 1 year. Its share price rose by 15 % whereas Bajaj s share price rose by 300% in last one year i.e. Bajaj Auto is only operated base not fundamental.
21 months back Bajaj was trading at 300 share price. Currently its CMP is 3000 ie 1000% increase in price. This is not fundamentally or technically justified.
Thus studying the fundamental and technical aspect of Bajaj Auto, it is trading at its highest level and we recommend a STRONG SELL on Bajaj Auto with target of it falling down to 2500 soon which will further go down to 2100 share price.
DISCLAIMER:- Smart Profit has taken due care and caution in compilation of data for its reports. The market view and investment tips expressed on Smart Profit are in no way a guarantee either express or implied. However, Smart Profit does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.
FOR FUTHER DETAILS CONTACT:-
SUMAN JAIN
(CEO)
+919820041126
Email: sumanjain@smartprofit.in
ANKITA JAIN
(Director)
+91981854402
Email: ankita@smartprofit.in
DIPAK MANGELA
(Research Analyst)
+919820260291
Email: dipak.mangela@smartprofit.in
BAJAJ AUTO LTD-OVERPRICED
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