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The Bajaj Auto scrip, under pressure since November 2013 due to weak domestic sales and, recently, due to Egypt banning the import of two- and three-wheelers, is likely to have bottomed out. Though sales in February weren’t up to the mark (domestic motorcycles sales fell 13 per cent), the stock remained stable, primarily due to an expected improvement in the fortunes of the company.
Analysts expect new launches to arrest the fall in the company’s sales and market share. Analysts at Kotak Institutional Equities say Bajaj Auto’s aggressive pricing strategy in the domestic executive motorcycle segment is likely to improve its market share by 200 basis points, owing to better value proposition (better features and similar pricing compared to competition), while growth in export volume will remain strong. With inventory at usual levels, the company expects to improve volumes due to the recent launch of Discover 100M and the expected launch of Discover 125M in March.
The near-term growth engine for Bajaj Auto, however, will be exports, which currently account for 45 per cent of volumes; in February, these rose five per cent year-on-year. While the Egypt import ban is a setback, the company expects to gain with higher sales to Nigeria, Africa’s largest market for two-wheelers. Analysts expect exports growth to be 15-18 per cent through the next couple of years.
Given the exports potential and the likely recovery on the domestic front, analysts such as Espirito Santo’s Aditya Jhawar and Nitesh Sharma continue to prefer Bajaj Auto to Hero MotoCorp. Despite their forecast of 18-20 per cent annual earnings growth till FY16, Bajaj Auto, they say, is trading (13.5 times FY15 estimated earnings) at a substantial discount of 13 per cent to its larger peer. They argue Bajaj should trade at a par with Hero, given its diversified business mix, lower exposure to the domestic two-wheeler sector, higher profitability and the ability to capture a larger share of exports. According to Bloomberg, of the 63 analysts polled, 59 per cent have ‘buy’ and 33 per cent ‘hold’ ratings on the Bajaj Auto stock.
Relying on exports
Analysts believe exports growth will primarily be led by Latin America and Africa, which account for about half of Bajaj Auto’s exports.
Low penetration, income growth and higher demand for two-wheelers are likely to propel the company’s growth in these markets. Kotak’s analysts believe there is significant export potential, given China’s annual two-wheeler exports are pegged at nine million, while India records just two million. And, these exports by India (Bajaj has a 60 per cent share in India’s two-wheeler exports) grew 20 per cent during 2010-2013, while Chinese exports grew just three per cent.
The fact that the Egyptian government banned the import of two- and three-wheelers remains a road bump. Exports to Egypt account for six per cent of the company’s revenue and eight per cent of its earnings before interest tax, depreciation and amortisation, primarily due to high-margin three wheelers.
Analysts at Kotak, however, argue the loss on the Egypt front is likely to be offset by additional volumes in the domestic market.
Given its 90 per cent share in the three-wheeler market, the company is likely to get the lion’s share of new permits (81,450) that the Maharashtra government is expected to issue between March and October 2014. They add this implies growth of 40 per cent in domestic three-wheeler volumes in FY15.
At the profit level, the gains should be higher, given three-wheelers have a margin of about 25 per cent, versus 18 per cent for two-wheelers, say analysts.
Domestic revival?
The biggest concern has been the steady decline in domestic market share (a 450-basis-point fall in the first nine months of FY14), with volumes falling 16 per cent year-to-date. The company is expected to end FY14 with a market share of about 20 per cent, against 24.4 per cent in FY13. This is because of multiple variants of the Discover and lack of focused promotions, which analysts say led to confusion among customers.
Espirito Santo analysts believe a strategy of restricting Discover platform models to three distinct categories of the M series (100M, 125M, and a yet-to-be-announced model), increasing traction for new products and lower inventory will drive strong retail sales for the executive segment, the key underperformer for Bajaj Auto. Through the past year, the company has lost about 500-600-basis-point market share in this segment.
In the premium segment, Bajaj’s volumes so far this financial year are down just four cent. Analysts expect a rebound in FY15, led by new launches of Pulsar (one in the 200-cc category and two in the 400-cc segment).
