Bajaj Auto: Back in the game

With the Discover 100 cc a big success, the Bajaj Auto stock has been a big mover in September, gaining 19 per cent to the Sensex’s 8 per cent. The Pune-based firm has sold 100,000 bikes in less than two months of the launch, taking on Hero Honda, the unquestioned leader in the space with a share of over 80 per cent.

Industry watchers say Bajaj Auto has priced the bikes competitively at levels of Rs 40,000, making them cheaper than Hero Honda’s bikes and that should have pulled customers apart from the mileage and technology. Besides, lower interest rates and some attractive financing schemes in an improving macroeconomic environment in urban markets would have helped the company push sales.

It is possible Bajaj Auto has taken away some share from Hero Honda. However, operating margins on entry-level bikes are usually low compared with those for executive or premium bikes, and therefore, volumes will have to be large for the company to make meaningful money.

Nevertheless, return to the 100cc space appears to have been a good idea and if the Discover 100cc can sustain a run-rate of 20,000 bikes a month, the effort would have paid off. Meanwhile, the management is also focussing on the Pulsar in the premium segment—a space in which it has been the market leader.

After losing market share in the domestic motorcycle market for the last five quarters or so, Bajaj Auto gained about 300 basis points in the June quarter to push up its share to 25 per cent.

Besides, the operating profit margin (OPM) expanded to 16.6 per cent and with raw material prices still benign, analysts believe the OPM this year could end up at 16-17 per cent. At Rs 1,679, Hero Honda trades at 19 times estimated 2009-10 earnings while at Rs 1,454, Bajaj Auto trades at around 18 times.