Car News

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. 150 (ex-bonus
adjusted). On 25th November, 2010 the stock rose to touch the Rs. 1664
level i.e. more than 1000% increase in price. This is not
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. 1180.

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. The directors of Smart Profit may
hold a position in the recommended script.

FOR FUTHER DETAILS CONTACT:-
SUMAN JAIN
(CEO)
+919820041126
Email: sumanjain@smartprofit.in

ANKITA JAIN
(Director)
+91981854402
Email: ankita@smartprofit.in

DIPAK MANGELA
(Research Analyst)
+919820260291
Email: dipak.mangela@smartprofit.in

MANSINGH RAI
(Customer Care Executive)
+919320907684
Email: mansingh.rai@smartprofit.in

SHAILESH GOWDA
(Customer Care Executive)
+919967394114
Email: shailesh.gowda@smartprofit.in

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