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Bajaj Auto Bad times will not last long Triple dose of reduction in product price, fall in running cost and reduction in loan EMIs will make the industry turnaround faster and more solid.
There has been slowdown in two-wheeler industry in October/November 2008. Due to the effect of high base, dealer level inventory clean-up and poor availability of customer credit, Bajaj Auto (BAL) has seen its two wheeler unit sales fall by 51% during the said period. Due to 42% rise in exports, overall two wheeler sales of BAL were down 35%. This is against two-wheeler industry de-growth of 10%. There may not be significant growth and in fact one can expect fall in volumes to continue during the rest of the year due to risk aversion in bank lending and slowdown in the general economy. However this is going to be temporary phenomenon and we expect two-wheeler industry to be one of the first industries to be back on growth track. BAL offers products in all motorcycle segments-Platina (entry), Discover (executive), XCD (executive) and Pulsar (premium). It is also the largest three-wheeler manufacturer in India. Two-wheeler is a necessity and not a luxury Road-based mobility (estimated as billion passenger-kilometers, BPKM) in India has been steadily rising. Although buses account for nearly 75% of this, a rapid rise can be seen in the reliance on para-transportation modes (cars, two-wheelers and three-wheelers). For example, during the 1990s, mobility by two-wheelers, three-wheelers and cars rose 11.7%, 12.3% and 10.2%, respectively, against a similar increase of 7.7% for buses, as per one estimate One of the working papers of the Planning Commission estimates the elasticity of BPKM with respect to GDP to be between 1.5 and 2.2. As public transport system’s expansion is highly inadequate and car growth will trail growth in two-wheeler due to affordability, parking and road conditions, two-wheeler industry’s share in BPKM will continue to grow ensuring that its growth will me much higher than the GDP growth. Current industry problems are only transitional and growth will bounce back once the economic conditions stabilise. Fall in excise duty will help early revival of industry Excise duty on two wheelers has been brought down by 4% in the latest stimulus package. As two-wheeler industry is a price sensitive segment, price reduction in the form of passing off of the lower excise burden will help faster revival of the industry. Fall in petrol prices is an added spice Government has brought down the petrol prices by Rs 5 per litre and the way crude oil prices are going down, petrol prices are likely to be lowered further. Lower running cost will make two-wheelers more affordable further helping the relatively faster revival of the industry. Bank lending rates are coming down With fall in inflation and pressure from the RBI, banks have started reducing interest rates and the pace of fall is going to gather steam as we move forward. As economic conditions stabilise, risk aversion among banks will also reduce. This will remove one of the main irritants for the industry. Triple dose of reduction in product price, fall in running cost and reduction in loan EMIs will make the industry turnaround faster and more solid. Pent up demand will materialise sooner if not later The pent up demand due to increasing urbanisation, poor public transport, higher disposable income due to tax cuts and higher government/PSU salaries is bound to materialise sooner or later. We expect good demand to emerge due to parliamentary elections also. Moreover shift of demand from two-wheelers to cars will also slowdown as economic growth rates moderate benefiting two wheeler industry. BAL being the second largest and at the same time a very agile player should benefit. New launches Bajaj Auto plans to launch a new motorcycle each month for six months starting January 2009. In the meantime Bajaj Auto Finance has launched an attractive 7.99% low interest retail finance scheme nationwide across 300 Bajaj Dealers to revive the sales. It also plans to launch two three-wheelers -one in smaller passenger carrier and other in goods carrier segments. On the exports front, where the company has registered an impressive 42% rise in motorcycle sales in the two montsh of October and November, it plans to achieve exports of 1 million units in financial year 2010. Export sales growth to moderate but still remain strong BAL’s motorcycle exports have been robust so far in the current fiscal, registering a growth of 41.2%. Though this growth rate is expected to moderate due to high base effect, going forward, it is likely to still remain strong as most of BAL’s markets (Africa, the Middle East, SAARC, and Latin America) are relatively less affected by the current slowdown seen in western economies. Falling raw material prices augur well for margin improvement Metal and plastic prices have cooled off substantially in the last few months. As contracts are renewed at lower prices, production cost will come down, paving the way for revival of profit margins, which have come down in the recent past due to higher raw material costs. We do not expect cost reductions to be passed on as the prices have already been lowered due to fall in excise duty. Dismal second half already factored in the price For the six months ended September 2008, the company registered sales growth of 9% to Rs 4859.19 crore. PBT before EO was down 7% to Rs 588.12 crore. For the quarter ended September 2008, its sales grew 8% to Rs 2548.43 crore. PBT before EO was down 9% to Rs 327.01 crore. With no immediate and substantial improvement likely in customer credit availability and sentiments, one can assume a bad second half. But in the last three months that is since 19th September 2008, the share price has already fallen 36%. In the second half ending March 2009, we expect BAL to register around 25% fall in sales and about 49% fall in PBT before EO. Even with this fall, the company would be able to clock adjusted EPS of Rs 43.3 in FY 2009. The share price trades at Rs 404. P/E works out to just 9.3. Once the company comes back on growth track within next few quarters, one can expect decent returns.
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