Bajaj Auto (Bajaj) and Hero Motocorp (HMCL) severely lagged Eicher Motors (Eicher) and TVS Motors (TVS) in price performance. While Bajaj’s and HMCL’s stock price rallied 1.6x and 1.4x, respectively over the period FY12-Q3FY18, Eicher and TVS have emerged significant wealth creators with their stocks rallying by 9.7x and 12.5x, respectively. This is amply evident from the volume growth numbers of the incumbent players in the two wheeler space.
Bajaj has been a noticeable laggard and seen a 2.3% CAGR degrowth in its sales volume, while HMCL reported a pedestrian 4.5% CAGR. In comparison, TVS and Eicher have delivered double digit volume growth of 11.2% and 45.9% CAGR respectively. An interesting statistic is the fact that TVS volumes in two wheelers are at par with those delivered by Bajaj Auto.
What has ailed Bajaj Auto…?
Bajaj Auto over the period FY12-17 focussed on high value products and the export market.
A fallout of this was the fact that Bajaj saw its market share decline in the entry segment (75-125 cc).
- In the 75-110 cc segment Bajaj Auto’s volumes share dipped 500 bps to 20% over the period FY14-17
- The 110-125 cc also witnessed market share loss of 794 bps to 10.5% over the same period.
- A major beneficiary of this market share translation was HMCL
Despite focus on the mid segment its performance was a mixed bag.
- In the 125-150 cc segment its market share improved by a whopping 1870 bps to 62% driven by a robust performance of Pulsar NS 160 and its refreshes.
- In the 150-200 cc category it got a drubbing and it lost its monopoly status with market share dropping by 2750 bps to 24%.
- The main contender who gained was TVS driven by the stellar performance of its model Apache 200
In the premium segment (350-500 cc) too Bajaj saw market share decline by 570bps to 31% as a result of the formidable performance displayed by Royal Enfield. While Bajaj is conspicuous by its absence in the upto 350cc segment, it has a comfortable duopoly with Eicher in the 350-500 cc segment. However, here too Bajaj lost 600bps of market share due to refreshes of Eicher’s 350 classic motorcycle.
The Three-Wheeler segment contributes 16% of the total sales volume for Bajaj. In FY14, Bajaj held 54% market share in Three-Wheeler segment and the same has grown by 300 bps to 56.7% by FY17. This strong growth has come from market share gains from Piaggio and M&M. Bajaj’s exports over the same period de-grew marginally by 2.7%. Thus the overall performance in volume was a mixed bag.
This resulted in virtually flat revenue growth of 2.6% CAGR to Rs 21,770 crore in the period FY14-17. One silver lining to the performance, in an otherwise lacklustre period, was the margin expansion of 160bps to 24.4% in FY17 over FY14.
FY18 signals a year of revival
With the mid segment getting over-crowded and fierce competition prevalent, Bajaj re-focussed on the entry level segment and premium offerings in FY18.
In the entry segment Bajaj introduced a refreshed version of its CT100 and launched Duke 125.
Mid segment continues to see refreshes of the Pulsar, as the way forward along with the new launch of Avenger 180.
In the premium segment Bajaj has the recently launched Dominar and new product introductions in collaboration with Triumph are on the anvil.
FY18 has witnessed a significant improvement in the fortunes of Bajaj Auto. It not only gained market share in the entry segment and we expect the same to play out in the premium segment.
Two wheeler segment to see turbulence going ahead
For the sector as a whole we expect diminished market share gains for HMCL due to the aggression of Bajaj. The fallout of this is expected to impact HMSI materially as it has been unable to gain ground in the premium and mid segments
Eicher, which has had a dream run, is expected to witness stagnation in volumes as international majors Harley Davidson and Triumph bring their products to the Indian market. The relaunch of Jawa has been nothing less than spectacular and it is evident in its humongous pre bookings. With Bajaj also launching Dominar the competitive intensity is going to be cranked up several notches. This can have a telling impact on the volume growth over the next 4-6 quarters. TVS motors is one player that needs to be watched in this space.
It remains to be seen whether Bajaj volume growth can repeat the success it has achieved in FY2019 over the next couple of years.
Bajaj financial outlook much better than historical
We expect overall volume to grow at 13.3% CAGR to 58.2 lac vehicles over the period FY18-21E
This is to be driven by 13.5% CAGR in 2W volumes and 12.4% CAGR in 3W volumes. In line with this, the Revenue, EBTIDA & PAT are expected to record 12.7%, 13.0% and 11.5% CAGR, respectively, during FY18-21E. Return ratios are expected to remain in high 20s.
At the current CMP of Rs.2714, Bajaj is available FY21 P/E 13.6. Valuation appears benign, considering the downside is protected and upside is limited. Given the downside protection, Bajaj will have to deliver on volume growth story and that remains the key monitorable in the immediate future.