Car News

Bajaj Auto Ltd, the 2nd largest manufacturer of two-wheelers in
India, reported less growth compared to its peers, with production
constraints, diminishing brand image and market acceptance, coupled
with detoriating quality & inability to achieve target sale, the stock
looks struggling.
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. Exports sale dropped monthly as well as yearly.
FIERCE COMPETITION
Honda who has newly emerged in the market for two wheeler segments, is
presently producing 1.4 lakh units/month it is further increasing its
capacity to produce 2 lakh units/month as it is commencing production
in its second plant in Alwar (Rajasthan). It is also starting its
plant in Hyderabad and Haryana. Suzuki is also in the process of
doubling its capacity.
Hero Honda, the market leader in this sector, is increasing capacity
by 2000 units per day. Currently it is producing 50 lakh units per
year and targeted is 56 lakh units per year. TVS is increasing its
production capacity too. TVS is also launching a new variant in two
wheeler for rural market which will be a 3 seater along with luggage
space.
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.
Bajaj is not in any process of increasing its capacity. They are
facing constraints to sell off their current capacity to the fullest.
Bajaj is not introducing any of its new variant as well.
In three wheeler, Mahindra & Mahindra, Piaggio, TVS are fast capturing
the market. TVS is doubling its capacity for three wheelers. Italian
based Piaggio is increasing its capacity to 40000 units per month.
This fierce competition in two and three wheeler sector is affecting
Bajaj's survival in industry.

MARKET RESEARCH ON AUTO SECTOR:-

According to market research conducted 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 to17.5%
in Nov 2010. The rapid expansion of competitors, unsatisfactory
quality of product and negligible marketing promotion strategy of
Bajaj with decreasing market share signifies its downfall in auto
industry.
On the domestic front, Bajaj Auto sold 1.75 lakh units of two
wheelers. Consolidating the overall two wheelers sold in Nov 2010 by
all the players, we can sum up to 10 lakh units have been sold in
India for this month (Hero Honda- 421366, Bajaj – 175000, TVS- 139541,
Honda- 129627, Suzuki- 25439, Yamaha- 22710, Mahindra- 15854, Others
like LML, Kinetic, Yo bikes- 70000). This indicates the market share
of Bajaj to be 17.5% in domestic market. Bajaj held market share of 35
% in 2006. 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 two years.
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 Honda & Honda has
waiting period ranging from 2- 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
800-2500. 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 the level that dealers are not even provided
with sufficient marketing accessories like brochures and pamphlets.

OPM 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.

VALUATION:-

Considering the fact that the scrip is currently trading at a PE of
15.88x which is very high, the scrip is available at the premium hence
we advice to stay away from this counter
The leader in this segment Hero Honda 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 operater base not fundamental.
2 years back Bajaj was trading at 300/share price. On 3rd November,
2010 the stock touched 3200 i.e.1600 due to 1:1 bonus and its is more
than 1000% increase in price. This is not fundamentally or technically
justified. Fundamentally, Bajaj is losing its ground by decreasing
market share. 4 years back, it enjoyed market share of more than 35 %
and currently its market share is mere 17.5 % (as explained above) and
further on a fall.
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 1366 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.

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

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

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