BAJAJ AUTO LTD- RIDING TOWARDS DARKNESS
Bajaj Auto Ltd, the second largest manufacturer of two-wheelers in India, has reported a lower growth compared to its peers. Due to its production constraints, decreasing brand image, market acceptance, and inability to achieve target sales, the stock seems to be struggling.
It seems probable that within the next 6 months Bajaj may downgrade to the 4th position from its second position in the two wheeler segment, giving way to Honda and TVS Motors to up their positions in the Indian market.
For the month of November 2010, total sales for Bajaj Auto dropped by 20% to 2.99 lakh units compared to 3.70 lakh units sold in October. The sales of the two wheeler segment decreased drastically from 3.30 lakh in October 2010 to 2.65 lakh in November 10.
Exports too declined in the monthly as well as yearly period. Total export for the month of November came in at 90,869 units compared to 98,521 units in the same period last year, reflecting a total decline of 8%. In October 2010, the exports recorded were 110387 units.
FIERCE COMPETITION
Honda who has newly emerged in the market, is currently producing 1.4 lakh/month and is further increasing its capacity to produce 2 lakh/month, as it is commencing its second plant in Alwar (Rajasthan). It is also starting its plant in Hyderabad and Haryana. Suzuki too is in the process of doubling its capacity.
Hero Honda, the market leader in this sector, is increasing capacity. Currently it is producing 50 lakh units per year and has set a target of 56 lakh units per year. TVS too is in the process of increasing its production capacity. TVS is also launching a new variant in two wheeler segment, for the rural market, which will be a 3 seater along with luggage space.
Mahindra, an established auto player has also entered the two and three wheeler market. It is vigorously trying to make 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 a capacity of 70000 units per month soon.
Currently, there is no information regarding Bajaj increasing its capacity. They are facing constraints, in selling the units that they are currently manufacturing. Bajaj is not likely to introduce any of its new variant in the near future.
In the three wheeler segment, Mahindra and Mahindra, Piaggio and TVS are capturing market share. TVS is also doubling its capacity in the three wheelers segment. The Italian based Piaggio is also increasing its capacity to 40000 per month. This fierce competition in the two and three wheeler sector is affecting Bajaj's leadership in the industry.
MARKET RESEARCH ON AUTO SECTOR :-
According to market research performed on consumers, the most preferred brand of two-wheelers is Honda, followed by Hero Honda, TVS and then Bajaj.
Bajaj Auto's market share has been decreasing from 35% in 2006 to 17.5% in November 2010. The increasing expansion of competitors and the decreasing market share signifies its performance in the auto industry.
On the domestic front, Bajaj Auto sold 1.75 lakh units of two wheelers. Consolidating the overall two wheelers sold in November 2010 by all the players, we can sum up that 10 lakh units have been sold in India for this month (Hero Honda- 421366, Bajaj- 175000, TVS- 139541, Honda- 129627, Suzuki- 25439, Yamaha- 22710 and Mahindra- 15854, Others like LML, Kinetic, Yo bikes- 70000). This signifies that the market share of Bajaj is 17.5% in domestic market. Its market share in 2006 was 35 %. In the current scenario, it is further expected to fall to 15% in the next 6 months and less than 10% in the next two years.
We interacted with Bajaj Auto dealers and they said that Bajaj has been 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 Honda and Honda have a waiting period ranging from 2- 8 months, whereas Bajaj 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 800-2500.
OPM PRESSURES TO INCREASE SEQUENTIALLY:-
Input costs have increased recently following the spurt in steel, rubber and aluminum prices. Thus, Margins across the Auto sector are expected to contract sequentially to reflect higher input costs. This will result in very high operating margin pressures.
VALUATION:-
Considering the fact that the scrip is currently trading at a PE of over 20x which seems high as the scrip is available at the premium, we advice investors to stay away from this counter.
2 years ago Bajaj Auto was trading at a price of Rs. 300. On 25th November, 2010 the stock rose to touch the Rs. 1664 (ex bonus) level i.e. more than 500% increase in price. This may not be fundamentally or technically justified.
Thus studying the fundamental and technical aspect of Bajaj Auto we recommend a SELL on Bajaj Auto at CMP 1489 with a target of Rs. 1100.
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.
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