Bajaj Auto

‘Business to Lagos has not been impacted and there’s no reason to be circumspect’- Mr. Rakesh Sharma, executive director, Bajaj Auto

Update on the Indian Equity Market:

On Wednesday, NIFTY closed positive (+0.9%) at 12,090. NIFTY50 led by TATAMOTORS (+10.7%), YESBANK (+8.6%) and TATASTEEL (+5.8%). ZEEL (-6.4%), HEROMOTOCO (-3.6%) and DRREDDY (-3.1%) were the top NIFTY losers. METAL (+3.1%), REALTY (+2.2%) and FIN SERVICE (+1.4%) were the top gaining sectors. MEDIA (-0.8%) was the only sector that ended negatively.

Excerpts from an interview with Mr. Rakesh Sharma, Executive Director, Bajaj Auto published on Livemint on 5th February 2020:

  • There has been a ban on the movement of two-wheelers and three-wheelers on certain roads in Lagos city for quite some time. There has been a law that says two-wheelers and three-wheelers cannot ply within Lagos city on these roads.
  • What has happened now is that there has been a restatement of this law and thereafter more rigorous enforcement because of congestion which they are experiencing and that is what has triggered this spate of news.
  • There are some 400 roads and by lanes within the Lagos city which had been identified quite a few years ago, maybe a couple of years ago. So they are just enforcing those things that these vehicles are not permitted.
  • Nigeria is a large country and motorcycles in Lagos city is probably only 6-7% of their business. Similarly, three-wheelers is also about 10% of their business so it is really not a very significant event as of now.
  • One can run a motorcycle on a commercial basis in certain areas, but what happens is it becomes more inconvenient as suddenly if you have to go from point ‘A’ to point ‘B’ and in middle there is a road where it is not allowed, it becomes a problem.
  • Total two wheeler exports to Nigeria are less than 30% of their exports, in the magnitude of 25% or so.
  • As things stand now, they are not anticipating any major impact. In international business, this kind of things happens all the time.
  • Bangladesh did it last year when they did not permit the three-wheelers so these things sort of cancel each other. So it is not a significant event from their perspective- not for Nigeria and not for the international business.
  • It is difficult to imagine that this kind of thing suddenly becoming an epidemic across Nigeria. So according to him, they will wait and watch.
  • At this stage, it is not even a setback. It is temporary irritation and he said he would not classify this as a setback. They encounter these things all the time in emerging markets. It does not really make them sit up and sweat.

Consensus Estimate: (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 3,158/- as on 5-February-2020. It traded at 18x/ 17x/ 15x the consensus earnings estimate of ₹ 174 /183 /204 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 3,226/- which implies a PE multiple of 16x on FY22E EPS of ₹ 204/-

Bajaj Auto- Exports saved the day for Bajaj Auto in November.

Excerpts from an interview of Mr Rakesh Sharma- ED- Bajaj Auto with CNBC- TV18

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.5% lower. Among sectoral indices NIFTY PSU Bank (-2.9%), NIFTY Metal (-2.6%), and NIFTY Media (-2.4%) closed lower. While NIFTY Realty (+1.3%) and NIFTY IT (+0.5%) closed on a positive note. The biggest losers were Yes Bank (-7.6%), Bharti Infratel (-5.8%), Tata steel (-5.2%), whereas Bajaj Auto (+3.1%), Bajaj FinServ (+1.7%) and TCS (+1.6%) ended with gains.

  • They do not expect the sales in the month of December to hit      4 lakhs because it is a seasonally weak month.
  • Exports will continue to grow. But 3 wheelers and the domestic market will see a pullback when the model year changes.
  • The company is holding steady margins and there is no sacrifice of margins.
  • There is no need to shore up the sales in an unnatural way as November and December follow a high season period.
  •  The mix is holding steady for the company, 3-wheeler are improving and there is a gentle tailwind on the exchange rate side. So, the margins are not going to see any shift
  •  Speaking about international markets and exports, the international performance is steady and solid and the key driver for this has been the African continent where the economies are doing well.
  • Bajaj has a competitive position in the African continent, with every 3 bikes sold one is of Bajaj.
  •  Bangladesh and the Philippines are acting as bright stars and are an important market for Bajaj.
  • These markets are doing better than industry and are in top-10 markets for the company.
  •  Speaking about price hikes post BS-VI transition, Bajaj will have to look internally and externally but certainly, the prices will increase.
  • Given the situation of the economy any kind of price increase will have a dampening effect on the demand.

Consensus Estimate (Source: market screener)

·        The closing price of Bajaj Auto Ltd was ₹ 3261/- as of 03-December-2019. It traded at 18.5x/ 17.3x/ 16.8x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 176/ 188/ 194 respectively.

·        Consensus target price of ₹ 3,069/- implies a PE multiple of 15.8x on FY22E EPS of ₹ 194/-.

Growth at Bajaj Auto has outperformed industry

Update on the Indian Equity Market:

On Monday, Sensex ended at record closing high of 40,302, up 137 pts; Nifty ended at 11,943; IT index was the biggest sectoral gainer, while auto stocks bled the most. Infosys share price closed 3% higher at Rs 709 after the firm said it has not received any prima facie evidence so far to corroborate any of the allegations made by the anonymous whistle-blower. Infosys, VEDL, Tata Steel, HDFC, ONGC were among the biggest gainers, jumping up to 3%. On the other hand, Maruti Suzuki, Hero MotoCorp, IndusInd Bank, Tata Motors were among the biggest losers, shedding up to 2.5%. Among sectoral indices, NIFTY IT (+0.8%) NIFTY Metal (+2.8%) closed higher while NIFTY Auto (-1.4%), NIFTY media (-3.3%) ended on a negative note.

Growth at Bajaj Auto has outperformed industry

Key takeaways from the interview of Mr Rakesh Sharma, Executive Director, Bajaj Auto; dated 4th November 2019:

  • Mr Sharma stated that the company reported the highest ever retails of all business in its history by a wide margin. The motorcycle business turned in a retail sales performance of 400,000 units plus, which is ~50% growth YoY. It grew by 28% over the festive period of last year. Small commercial vehicle (CV) business reported retail sales of 43,000 plus and KTM business doubled reporting the highest ever retail performance. So, it was a wonderful month for Bajaj Auto and the company is happy that almost half of the growth in domestic motorcycle by newly launched products (in the last six months) which have done exceedingly well and brought down the inventory levels.
  • Mr Sharma said that they had proactive engagements with the channel where it was informed that come October Bajaj Auto will be easing the burden.
  • Mr Sharma added that he has not seen such low channel inventory in the last 18 months and suspects that the company should have moved the market share needle as well.
  • When asked about the future performance he said that the economy is entering a naturally lower part of the quarter now. Post the festive seasons, the sales do drop so there is obviously a combination of postponement that has occurred from July-August and a bit of advancement that would have occurred from November. All of these combine to give the surge during the festive season. So, there is a natural down cycle that we will now hit and added on this will be the uncertainty in the minds of a lot of people about the BSIV-BSVI transition.
  • He refrained from commenting that Bajaj Auto would see similar kind of numbers, but he confirmed that this festival season has served as a very good trigger to bottom out what the Indian industry was experiencing.
  • Mr Sharma said that the company still needs to navigate the turbulent change that is impending, which is BS-IV to BS-VI, and will have to see how the consumer behaviour will occur during this change.
  • Mr Sharma informed that Bajaj Auto has always been outpacing the market by 5-8% points and thinks that Bajaj Auto outpaced the industry growth by at least 15% points on the back of new products. Therefore, he is confident of market share expansion.
  • When asked about the price cuts and margins he commented that the company’s strategy of uplifting the consumer step by step has helped the realisation per vehicle to move upwards. The stocks are now in a very manageable zone.
  • Mr Sharma said that softer raw material costs, steady foreign exchange rate (45% of revenues come from overseas sources), improved portfolio and favourable business mix is contributing to margin expansion but would not like to further comment on margin as they are in an ambiguous situation in November-December-January.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 3,212/- as of 04-November-19 and traded at 18.4x /17.2x /16.7x the consensus EPS for FY20E / 21E / 22E of Rs 176/188/194 respectively.
  • Consensus target price of ₹ 3,049/- implies a PE multiple of 15.7x on FY22E EPS ₹ 194/-.

Bajaj Auto – Is the demand recovery around the corner?

Update on the Indian Equity market:

On Thursday, NIFTY closed 0.4% lower. Among sectoral indices NIFTY Metal (-3.0%), NIFTY Financial services (-1.2%), NIFTY BANK (-1.1%) closed lower while NIFTY Media (+2.5%), NIFTY PSU Banks (+0.2%) NIFTY Auto (+0.2%) ended on a positive note. The biggest gainers were Yes Bank (+33.6%), Bharat Petroleum (+7.5%), Zeel (+6.5%) whereas Vedanta (-4.7%), Hindalco (-4.0%), Coal India (-3.5%) ended with high losses.

Bajaj Auto – Is the demand recovery around the corner?

Excerpts from an interview with Rakesh Sharma – Executive Director, Bajaj Auto

  • Mr Sharma says that in the current situation retail numbers are the most important ones to look at. It was very difficult to manage the supply chain and putting it in line with demand fluctuations in the past few months.   
  • He says retail demand is showing signs of a pickup.
  • Speaking about the September month specifically, he says, retails in the second half of September have started to look up.
  • Though the company volumes are marginally lower as compared to last year, it is a good improvement in the prevailing scenario.
  • Speaking about exports he says that the global picture is pretty much stable. Africa is doing very well. The company gets 40%-45% of its business from Africa. Latin America continues to show muted growth caused mainly by the slowdown in Argentina and Mexico.
  • The Philippines is a market which the company is looking for.
  • Mr Sharma says, after a bit of a decline in 1Q FY20 the current quarter is looking much better.
  • He says the uptrend is visible in 125cc segment, mainly because of the anti-lock braking system (ABS) which increased the prices of 150cc plus segments.
  • Before the launch of Pulsar125, Bajaj Auto had a 1% market share. After its launch, it is in the range of 10%-12%.
  • Speaking about further discounts he says, they are not going to add much because the company had already announced festive schemes.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 2910 /- as of 03-October-19. It traded at 16.3x /15.0x the consensus EPS for FY20E/ FY21E of ₹ 178/193 respectively.
  • Consensus target price of ₹ 2832/- implies a PE multiple of 14.6x on FY21 EPS of ₹193/-

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

Update on Indian Equity Market

A slew of fiscal measures announced by the Finance Minister on Friday morning led to a strong rally in Indian equities. The crown jewel of the fiscal stimulus package was the cut in corporate tax rate from effective 30% to effective 22% plus surcharge (net 25%) for all domestic corporates. The announcement of tax cut led to increased street earnings estimates across sectors. The surcharge on capital gains made on equity that was announced in the Budget has also been withdrawn. Nifty closed 5.3% higher at 11,274. The rally was led by NIFTY AUTO (+9.9%), NIFTY BANK (+8.3%) and NIFTY FINSERV (7.2%). All indices except NIFTY IT (-0.9%) ended in the green.

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

(Highlights from interview hosted on CNBC)

  •  Bajaj Auto has been market leader in the sports segment for the past 15 months and even gained market share. Market share of the sports segment is now between 35-40%.
  •  Bajaj Auto has taken a price hike across SKUs in the sports segment. Price hike across SKUs is about 1% except 2 products. 5% hike each in Pulsar 150 (passed on ABS cost which was absorbed by co. till now) and Dominar 400.
  • Bajaj Auto is 2nd after Hero in terms of market share in the commuter segment. They don’t see pricing power in the commuter segment, hence haven’t been able to take any price hikes there except in one SKU (5% share of total volumes hence negligible impact).
  • The government should clearly convey there is no GST cut on cards as right now there is a detrimental effect on the channel. Some customers are waiting in anticipation of a GST cut which is not helping at all.
  • In terms of discounts, Rajiv Bajaj said, “I expect from Hero a mother of all schemes to start very soon towards the end of this month because unless they liquidate over a million BS-IV vehicles, they are going to have trouble with BS-VI just around the corner. So I think the industry will be shaken up by a huge promotion by the market leader and in anticipation, we have to be ready for that.”
  •  3 years ago when the industry was shifting from BS-III to BS-IV, discounts ranged from Rs. 3,000 to 20,000. Not in such a panic stage this time. But there is a need to be prepared for significant impact as the channel is bursting with stock.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 2,739/- as of 20-September-19. It traded at 17x / 15x the consensus EPS for FY20E/ FY21E of ₹ 161 / 178 respectively.
  • Consensus target price of ₹ 2,687/- implies a PE multiple of 15x on FY21E EPS of ₹ 178/-

Most of the auto slowdown is the industry’s making

Dated: 23rd August 2019

Updates on the Indian market:

On Friday, markets closed in the green with BSE Sensex up 0.6% and NSE 50 up 0.8%. This was a reaction to the news that Finance Minister Nirmala Sitharaman was planning to hold a press conference after market hours.  The market expects a government intervention to revive the economy. The top gainers among NIFTY 50 stocks were Zee (+6.5%), UPL (+6.2%), Vedanta (+5.7%). Indusind Bank (-1.8%), ITC (-1.5%), Eicher Motors (-0.9%) were among the top NIFTY 50 losers. Among the sectoral indices, Media (+4.2%) and Metal (+3.4%) were the best performers while FMCG (-0.4%) and Private banks (-0.4%) were the worst performers.

Excerpts from an interview with Mr. Rajiv Bajaj- MD, Bajaj Auto published in mint dated 23rd August 2019: Most of the auto slowdown is the industry’s making

·       For the motorcycle industry, the YoY decline in sales is only 5-7%. This cannot be called a crisis. It is part of a normal industry cycle and a check for the robustness of a business model.

·       There are 4 areas where the auto industry has to improve before talking about government stimulus:

o   Industry’s domestic focus: Barring Bajaj Auto (40% revenue from exports) and TVS Motors (20% revenue from exports), other players have a negligible share of exports.  If companies had invested in global markets over the last 10-15 years and increased their exports, a 5-7% decline in one market would not have hurt them as much as it is hurting now.

o   Mediocre products: A lot of auto players are not able to export because their products are mediocre by world-class standards.

o   Innovation in the domestic market

o   Cost structure: Some manufacturers are guilty in terms of imposing very high fixed costs on their dealerships.  This works in good times but becomes a big burden in bad times.

·       Inventories have piled up since September 2018 when the industry was anticipating an extraordinary festive season. The situation is correcting now as nobody can hold BSIV stock for long. Therefore, there is a mismatch between wholesale (OEM to dealers) and retail (dealer to the customer) sales. The mismatch makes it look as if the industry is down by 15%-20% when in reality it is down by 5-7%. A 5%-7% retail decline is not enough for the industry to cry for help.

·       The industry has said there is a need for intervention in dealer/customer financing. Inventory financing should not be a big issue for large companies most of whom are cash-rich. In case of retail consumer financing, for a long time companies using their captive financing arms have shoved products in the hands of customers who didn’t really want to buy. This led to higher bad debts.  So pulling back of credit by some NBFCs is for a good reason.

Consensus Estimate (Source: www.marketscreener.com)

·       The stock price of Bajaj Auto is Rs 2,750/- as on 23rd August 2019 and trades at 17.2x/ 15.8x the consensus EPS for FY 20E/21E EPS of Rs 160/ Rs 173 respectively.

·       Consensus target price is Rs 2,686/- valued at 15.5x FY21E EPS of Rs 173.

Incentives for EVs: Push in the right direction by Government. Excerpts of an interview with Mr Rajiv Bajaj, MD, Bajaj Auto published on 11th July on the CNBC website.

Dated: 11th July 2019

• Views on incentives for promoting electric vehicles (EVs): One must be cautious as incentives that come today can go just as easily tomorrow. Manufacturers or entrepreneurs must be fixated on delivering a sustainable solution. EVs are becoming an attractive option considering the urban pollution and in that sense, the government’s push in the direction is a good idea.
• Incentives provided in the budget for EVs are significant. GST at 5% for EVs compared to 28% for IC engines, Faster Adoption and Manufacturing of Electric Vehicles (FAME) benefit of Rs 10,000 per kw and some of the reductions in the import duties will help. The government has put its best foot forward in offering a very significant package to those who are interested in putting out good quality electric vehicles. FAME benefit will be for those who are going to make EVs that meet certain quality standards, certain minimum standards in terms of various performance parameters.
• The positive side of the equation is the Government has been generous with the incentives and now it is up to the manufacturers to respond by leveraging this to put products into the market place. The negative is the draft notification that suggests that all three-wheelers and most two-wheeler should become electric by banning internal combustion (IC) engine scooters, motorcycles and three-wheelers. These two things should not be coupled in this manner that in order to encourage or promote one thing you have to artificially bury another thing which is world-class.
• Every member of the Society of Indian Automobile Manufacturers (SIAM) is developing EVs and everyone will be in the market with their own EVs in the very near future, in the next 12 months or less.
• It should be a phased transition to EVs as making 25 million two-wheelers and three-wheelers is not a switch that can be switched on or off overnight. The Government might be overestimating what can be done in the immediate term and underestimating what can be done in a medium-term future like 10-years.
• Bajaj Auto is working toward launching EVs (both 2-wheelers and 3-wheelers) just before implementation of BS-VI norms in April 2020. It would be a good time for EVs to make their way to market because people will be very sensitive to the subject of the environment at that time and current vehicles will get much more expensive because of BS-VI norms.
• Bajaj Auto is part of an industry that is experiencing great difficulty in terms of demand. Nobody knows exactly why the demand is low, nobody knows how this can be resolved or by when things will settle. Everybody is also concerned with what will happen when the next step of BS-VI comes into place and prices go up even further. These are very volatile, very uncertain, very difficult times where one has to just stay the course and wait it out.

Consensus Estimate (Source: www.marketscreener.com
• The stock price of Bajaj Auto is Rs 2,740/- as of close price of 11th July 2019 and trades at 15x / 13x the consensus EPS for FY 20E/21E EPS of Rs 186/214 respectively. 
• Consensus target price is Rs 2,831/- valued at 13x FY21E EPS of Rs 214.