Bajaj Auto: Executive search

The bike maker needs to prove that it can sell big volumes in the executive segment

It is possible that Bajaj Auto’s profitability will improve in the current year because of better volumes — expected to be up 10 per cent, a product mix that’s more in favour of high-priced bikes as also the full impact of falling raw material costs. Moreover, the bottom line should get a boost from a weaker rupee given that exports account for around 30 per cent of the turnover.

At the current price of Rs 934 — the stock rallied 5.6 per cent on Thursday — the stock trades at 13.5 times estimated 2009-10 earnings (ex-financial and ex-VRS). Even if the earnings are better, the stock would be only slightly cheaper at 13 times, which is higher than the historical average. For perspective, rival Hero Honda trades at 15 times estimated 2009-10 earnings.

For sure, things may be looking up for Bajaj Auto with the XCD 135cc doing well so far to clock an average of 20,000 bikes a month and the run rate likely to improve in the coming months. But a re-rating of the stock isn’t justified and can only happen if the next launch in the executive segment, scheduled for July, is a winner. At the end of the day, Bajaj Auto needs to prove that it can deliver volumes, on a sustained basis in the executive segment.

Having decided to vacate the entry segment (100cc), it needs to get a grip on the executive segment, which industry watchers believe would account for over a third of the market. Currently, this space has a share of around 28-29 per cent, and given that the consumers do have purchasing power, the executive segment could see momentum.

In the premium space, in which Bajaj Auto has been the leader, the Pulsar has yielded some share to Yamaha but a Pulsar variant is being launched next month. In any case, the premium segment accounts for just about 10-12 per cent of the motorcycle market, and although it’s a profitable space to be in, it’s in the executive space that Bajaj Auto needs to sell volumes.