Bajaj Auto: Betting on 100cc space

Bajaj Auto’s June quarter profit of Rs 293 crore was boosted by foreign exchange gains of Rs 100 crore. Better realisations from exports helped the top line stay flat at Rs 2,259 crore year-on-year despite volumes falling about 10 per cent. Sequentially, the revenue is up about 20 per cent.

After losing market share in the domestic motorcycle market for the last five quarters or so, the Pune-based firm’s share is up about 300 basis points to 25 per cent. Moreover, due to lower raw material prices, the operating profit margin for the June quarter has expanded to 16.6 per cent.

These benefits should continue in the current year and analysts believe that the operating margin for the year could be in the region of 16-17 per cent. Of course, margins would be driven by better volumes — expected to go up by about 4-5 per cent — and a better product mix. Bajaj should be able to cash in on the 9-10 per cent growth expected for the domestic motorcycle industry this year, most of which will be driven by pent-up demand, easier credit conditions and increased rural penetration.

Much will depend on the company’s new launch in the 100 cc segment, a space that it is revisiting. This segment is dominated by Hero Honda, which has close to 90 per cent share. Besides, competition in executive and premium segments remains strong with players like Honda Motorcycles and Yamaha doing well. Having lost some of its franchises in the last couple of years, Bajaj Auto could find it difficult to win back its market share.

Nevertheless, revenues could rise 7-8 per to Rs 9,500 crore this year, over the Rs 8,810 crore posted in 2008-09. The stock has been an outperformer over the past few months but at the current price of Rs 1,150 trades at just about 14 times estimated 2009-10 earnings, while at Rs 1,538, Hero Honda, a much stronger player, trades at just over 15 times. Clearly, Bajaj should trade at a bigger discount to Hero Honda.