Bajaj Auto: Obvious move

Analysts say the company has not focused enough on the scooter segment as it saw bigger opportunity in motorcycles.

Bajaj Auto’s decision to exit its five-decade-old scooter business by March doesn’t seem to have surprised the markets considering that the share prices of both Hero Honda and Bajaj Auto have shown similar trends in the last two days.

The reason for Bajaj’s exit from the scooter segment looks pretty obvious. Even as the over one million unit domestic scooter industry has grown between 10 and 15 per cent annually, Bajaj’s scooter sales have not been impressive for a long time. For the eight months of 2009-10, it sold 4,084 units of Kristal, its only scooter brand and an automatic variant, compared with 9,332 in the same period a year ago.

In November 2009 it sold a mere 258 units. Overall, scooter sales have accounted for a quarter of a percentage of Bajaj’s total two-wheeler sales in the current fiscal. Given these minuscule volumes, it would be difficult to even expect the scooter business to make profit. But certainly, the exit from the scooter business would have no significant financial implication for the company.

Analysts say the company has just not focused enough on the segment as it saw larger opportunity in motorcycles, five times the scooter market. Bajaj itself is aiming to become a specialist and the number one player globally in the motorcycle segment. Also, since motorcycles yield relatively higher profit margins, it makes sense for Bajaj to enhance its focus on the business.

Meanwhile, Bajaj’s new Discover 100cc along with Pulsar bikes has helped sustain volumes of 240,000-250,000 in the last three months. On Wednesday, Bajaj launched a sub-150cc sporty bike, the Pulsar 135LS, aimed at strengthening its position in the executive segment. Analysts say that new product launches and thrust on exports will help Bajaj sustain healthy volume growth ahead, which along with better product mix would help protect margins, even as raw material costs may put some pressure.

At the current price though, the stock trades at a PE of 13 times its estimated 2010-11 earnings, leaving little room for further appreciation in the near-term.