BAJAJ AUTO LTD OVERPRICED
Bajaj Auto Ltd, the 2nd largest manufacturer of two-wheelers in India,
reported less growth compared to its peers and its production
constrains, decreasing brand image, market acceptance detoriating
quality & inability to achieve target sale.
It's not far that within 6 months Bajaj will downgrade to 4th position
from its 2nd position in two wheeler giving its way to Honda & TVS in
Indian market.
April to September Two Wheelers Sales Reports in India
Bajaj Auto sales has been increased by 5.39% as compared to Hero Moto
Corp sales - 22%, Honda sales – 13.21%, Yamaha sales – 37.73%, Suzuki
sales - 39%, in Indian market, for the period of April to September
2011 as compared to same period in 2010. In future there will be
intense competition between Honda, Hero MotoCorp, Suzuki and Yamaha.
Looking at the overall scenario in the two wheeler sector in H1,2011
Bajaj Auto has reported only 5.39 % growth compared to average growth
of 20% in this segment.
Company
H1 2011
H1 2010
% Growth Avg % compared to the Industrial growth of 20%
Hero Moto Corp 3073852 2519973 21.98% + 1.98%
Bajaj Auto 1138910 1080632 5.39% - 14.61%
TVS Motors 971824 854536 13.73% - 6.27 %
Honda Motors 922979 815310 13.21% - 6.79 %
Yamaha 231032 172289 37.73% + 17.73 %
Suzuki 172631 125355 39.12% + 19.12 %
FIERCE COMPETITION:
Hero MotoCorp total capacity in its three plants – Dharuhera and
Gurgaon in Haryana and at Haridwar in Uttarakhand – is about 61.5 lakh
units. The company will be increasing its production capacity to 1 cr
units pa by an addition of two new plants one in Sanand, (Gujarat
project near Ahmadabad) 100% export oriented and another in
Karnataka.
Honda, who has newly emerged in the Indian market, its second plant
built in Tapukara industrial area of Rajasthan in Alwar has producing
capacity of 6 lacs units /annum. The company is now looking to double
the production capacity in that plant to 12 lacs units /annum by March
2012.
Also, Honda (HMSI) company has started building its third plant in
Narsapur Industrial area, 52 Km away from Bangalore Karnataka to
expand it's capacity to 40 lakh units by mid 2013, which will help to
reduce the delivery waiting period from 6 to 8 months. Therefore by
the end of the first half of 2013, Honda's total production capacity
will be 40 lacs units /annum.
The TVS Motors is pushing well on moped front. It is also bullish on
export front and exploring new opportunities to expand its export
market. Presently producing 25 lacs units /annum and further
increasing its production capacity to 35 lacs units /annum.
Mahindra, an established auto player has newly entered two and three
wheeler market. It is vigorously making a mark in this new segment
with its strong rural hold (it enjoys a good brand image because of
its tractors) and marketing strategies. They are coming up with
capacity of 70000 units per month soon.
Suzuki is all set to rage on the Indian market by increasing its
production capacity to 5.4 lacs units / annum from the current 2.5
lacs units / annum by the year 2012.
While Yamaha currently produces 6 lacs units /annum, it is looking to
raise this production capacity to 10 lacs units / annum by 2013 and
also aims to sell out up to 8,00,000 units in domestic markets
together with 2,00,000 exports.
Piaggio is penetrating in the two wheeler industry in India in an
ambitious way by setting up an assembly plant in Baramati near Pune
where the inputs will be 80% imported. They have already appointed 70
dealers throughout India. They are coming up with attractive
variations of bikes in January 2012.
Bajaj is not in any process of increasing its capacity. They are
facing constraints to sell off their current capacity to the fullest
and there is no news of any other new plant as the competitors.
In three wheeler, Mahindra & Mahindra, Piaggio, TVS are capturing
market firmly. TVS is tripling its capacity to 8000 units / month for
three wheelers. Italian based Piaggio is increasing its capacity to
40000 units / month.
With this we see Bajaj auto's Indian market share to go down less than
10%. Bajaj Auto monthly sales will be less than 1.5 lac due to Honda
which is increasing its production capacity to 40 lac units pa.
This fierce competition in two and three wheeler sector is affecting
Bajaj's survival in industry.
MARKET RESEARCH ON TWO WHEELER SECTOR IN INDIA:-
According to market research performed on consumers, the most
preferred brand of two-wheelers is Honda, followed by Hero MotoCorp,
Yamaha, Suzuki, and then followed by Bajaj and TVS.
In Indian two wheeler market, Bajaj Auto's market share has been
decreasing from 35% in 2006 to 16.5% in August 2011. The increasing
expansion of competitors, fuel price hike, increase in prices of two
wheele9rs, unsatisfactory quality of product and negligible marketing
promotion strategy of Bajaj with decreasing market share signifies its
downfall in auto industry.
In India the total two wheeler sales in the month of August 2011 is 12
lakh units in which Bajaj has only contributed around 2 lakh units
(Hero MotoCorp - 5,03,654, Bajaj – 199829, TVS- 1,63,705, Honda-
1,60,666, Suzuki- 26,897,Yamaha- 39,490, Mahindra- 15,120, Others like
LML, Kinetic, Yo bikes- 90000) . This signifies the market share of
Bajaj to be 16.5% in domestic market. Bajaj's market share has been
decreasing tremendously over the years and picturing the current
scenario, it is further expected to fall to 15% in next 6 months and
less than 10% in one year due to doubling production capacity of
Honda, Yamaha and Suzuki.
We interacted with Bajaj Auto dealers and as they said, Bajaj is
increasing inventory with their dealers and distributors. Thus the
sales recorded by Bajaj in last 5 months are not consumer sale but the
inventory sale of dealers and distributors. Hero MotoCorp & Honda has
waiting period ranging from 4 - 8 months whereas Bajaj's bikes are
overstocked with the dealers. A dealer's sale ranges from 150- 500
units per month depending on the area, but the inventory stock is
300-1200. Acceptance of Bajaj in market has gone for a toss. Dealers
have reported dissatisfaction for Bajaj. They say Bajaj have been
compromising on quality to reduce cost in order to face competition as
they can't further increase their price. They have reduced their
marketing promotion to this level that dealers are not provided with
sufficient marketing accessories like brochures and pamphlets.
OPM & POLICY PRESSURES TO INCREASE SEQUENTIALLY :-
Input costs have increased recently following the spurt in steel,
rubber and aluminum prices. Thus, Margins of Auto universe is expected
to contract sequentially to reflect higher input costs. This will
result in very high operating margin pressure.
With Government withdrawing DEPB (Duty Entitlement Passsbook Schme)
benefit scheme for exporters, Bajaj auto will face severe problems in
terms of their fall in export profit margin by 8%. Rajiv Bajaj, MD,
Bajaj Auto, stated his concern regarding the fall in export to take
place due to withdrawing of DEPB scheme and increasing competition
from China market in exports. He also shard his worry about further
slowdown expected in two wheelers in India.
VALUATION:-
The leader in this segment Hero MotoCorp is a better performer with
increasing market share in last 1 year. Its share price rose by 15 %
whereas Bajaj's share price rose by 300% in last one year i.e. Bajaj
Auto is only operated base not fundamental.
2 years back Bajaj was trading at below 300 share price. On October
26 2011 the stock touched 1758 after 1:1 bonus i.e.3500 which is more
than 1200% increase in price. This is not fundamentally or technically
justified. Fundamentally, Bajaj is losing its ground by decreasing
market share and expecting it to fall further.
With increase in competition, fall in demand, pressure rising due to
high input cost, tightening of export policies, Bajaj Auto is losing
grounds from domestic as well as export market. We are reducing our
estimates for H2,2011 to 6% to 8% compared to H1,2011 growth of 16%
to factor in lower than expected margins.
Bajaj Auto will get a hit at its export front as Hero MotoCorp has set
up 1.2 lakhs per month production capacity plant in Sanand (Gujurat
project near Ahmadabad) dedicated 100% export and Honda, through its
China plant has introduced its new variant (pricing 31,000 INR) in
Nigerian and South African market (Nigeria and South Africa contribute
50% export sales of Bajaj Auto). Hero MotoCorp has initiated its
distribution network in all the 11 countries where Bajaj is
exporting.
Thus studying the fundamental and technical aspect of Bajaj Auto, it
is trading at its highest level and we recommend a STRONG SELL on
Bajaj Auto at CMP 1758 with target it falling down to 1100 soon.
DISCLAIMER:- Smart Profit has taken due care and caution in
compilation of data for its reports. The market view and investment
tips expressed on Smart Profit are in no way a guarantee either
express or implied. However, Smart Profit does not guarantee the
accuracy, adequacy or completeness of any information and is not
responsible for any errors or omissions or for the results obtained
from the use of such information. CEO, Directors and staff may have a
position in the recommended stock.
FOR FUTHER DETAILS CONTACT:-
SUMAN JAIN
(CEO)
+919820041126
Email: sumanjain@smartprofit.in
ANKITA JAIN
(Director)
+919819854402
Email: ankita@smartprofit.in
DIPAK MANGELA
(Research Analyst)
+919820260291
Email: dipak.mangela@smartprofit.in
MANSINGH RAI
(Sr. Executive)
+919320907684
Email: mansingh.rai@smartprofit.in
SHAILESH GOWDA
(Sr. Executive)
+919967394114
Email: shailesh.gowda@smartprofit.in
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