Bajaj Auto - Is the company back on growth track?

Introduction:

Bajaj Auto is an automobile manufacture which most of us have heard since decades. The company is into manufacturing motorcycles. Listing down the company’s brands segment-by-segment.

  1. Entry: CT100, Platina
  2. Commuter: Discover, V
  3. Sports: Pulsar, Avenger
  4. Super-Sports: Pulsar, KTM, Dominar

What’s interesting in recent times?

The company seems very concerned about its current market share of motorcycles and wants to call itself a major automobile manufacturer aiming for market share of about 25%. The revenue growth was spectacular in FY19 with Bajaj’s market share improving by about 3% to 18.7%. Going by number of units, domestic sales increased by 29% and exports increased by 25% in FY19. This is the first time ever where their total sales hit 5 million units and international sales hit 2 million units.

Though they have seen reasonable growth in the Sports segment too, most of growth has come in the entry segment. Hence, the actual Revenue from Operations growth is lower than pure volume growth at 18.3% and PAT growth is at 16.7%.

Apart from that, promoters are buying shares in the market on regular intervals through Bajaj Holdings. Their shareholding increased from 49.3% in FY18 to 51.18% in FY19. Some KMPs of the company also bought some shares through market in FY20. Hopefully, there is some increased optimism within the company.

One can also appreciate that the stock price of the company held still while other Auto companies have seen rampant correction in their stock prices.

Market / Company Data:

Look at the segments data and Bajaj’s performance in those segments below.

Segment Market Share of Segment Market Share of Bajaj in Segment (FY19) Market Share of Bajaj in Segment (FY18)
Entry 26% 35.40% 29%
Mid-segment 51% Poor Poor
Sports 16% 44.10% 39.00%
Super-sports 7% 7.50% DNA
2019 2018 2017 2016 2015 2014 2013
Bajaj Motorcycle sales 4236873 3369334 3219932 3358252 3292084 3422403 3757105
KTM India Sales 50705 46321 34970 30362 22627 11050 7399
Production capacity (in lakhs)
2019 2018 2017 2016 2015
Waluj 24 24 24 24 24
Chakan 12 12 12 12 12
Pantnagar 18 18 18 18 18
Total two wheelers 54 54 54 54 54
Waluj 9.3 8.4 6.6 6.6 6.6
Total CVs 9.3 8.4 6.6 6.6 6.6

Production of 3W is fungible with production of Qute. Management plans to expand CV capacity to 1 million this year.

Entry Segment:

CT100 is 36% of domestic volumes for Bajaj and is sold at negative margins. The aim is to convert these sales to Platina which has single digit margins. The company slashed the price of CT100 aggressively in order to attain market share. KMP is justifying this pricing game saying that it is just 14% of the turnover.

Platina 110 is at the higher end of entry segment. The price of CT100 was actually slashed at around Q1FY19 and by the end of Q4FY19, the company managed to achieve higher growth in Platina and also slightly increased the price of CT100, but still at negative margins. One needs to validate if this kind of growth is sustainable for longer period of time.

Default risk of loans taken for entry segment bikes are higher.
Though we sell at poor margins in this category, our Exports, Sports & 3W categories give us 20% margins.

Commuter Segment:

As one can see from above tables, the company’s performance is poor in the commuter segment which is about 50% of the motorcycles market. Respected Chairman, Rahul Bajaj, has said that they will fight like never before in this segment to gain market share.

The Discover model has been performing poorly in this segment. The Company has launched 125cc model Pulsar to tackle this segment later. We can expect the company to launch more models in this segment.

In one of Conf Calls, KMP has mentioned that the commuter Segment market share has been decreasing over time. He says the customers are increasingly wanting to own Sports / Performance motorcycles. And the Entry-level motorcycles will continue to see the growth as cycle owners in the country want to upgrade to riding bikes. FYI, commuter segment contracted by 12% in volumes FY19.

Sports / Performance Segment:

Pulsar is a very strong brand for the company in this segment. Bajaj commands 44.1% market share among all Sports motorcycles sold in the country. They have recently launched Neon version in Pulsar brand and they are receiving good traction driven by their aesthetic appeal.

However, Pulsar Neon is priced cheaper compared to other Pulsar bikes of the same horsepower and analysts expressed their concern of whether there is some down-trading which is happening. KMP is justifying the move saying that they are targeting lower purchasing power customers using the Neon models. Another justification is that they will see up-trading from 125cc players due to this move. I think this was the growth driver for the company in Sports segment, but one needs to assess if this can continue for a longer period of time.

Avenger brand is more or less stagnant at volumes of 8000 / month. KMP doesn’t look hopeful on increasing the volumes of this brand. They have done some re-modelling and re-launching but doubt if it will do much for the company, especially when competing with brands at the likes of Royal Enfield. So one shouldn’t expect much from this brand.

Super-Sports Segment:

The Company’s products like Pulsar RS200 and Dominar 400 have gained decent traction. KTM has won special attention among urban consumers.

Bajaj Auto doesn’t directly own the KTM brand but through a subsidiary. It has invested a total of 1219 crores and holds approximately 48% stake in KTM AG of Austria (not just Indian subsidiary). KTM is the fastest growing motorcycle in the world. KTM sells about 212,000 bikes across the globe, with India being the largest market at about 50,000 bikes per year. About 100,000 KTM bikes are manufactured in Bajaj’s Chakan plant. They recently launched Duke 125cc bike and say that it has beaten all of their expectations.

The company is going to partner with Triumph to build and market products of ~350cc products. 350cc is above the horsepower of a typical product from Bajaj and is below the horsepower of a typical product from Triumph.

Exports:

Africa = 50%
South Asia to Middle East = 20%
Latin America = 15%
ASEAN = 15%

As one can see, Africa is the geography which is driving exports for Bajaj. Management expects further growth in exports through Africa. The brand which is very successful here is Boxer. African motorcycle market is mainly a Taxi market and Boxer seems to be doing well here. Other competitors in Africa are mainly Chinese and Japanese.

The company has excellent market share in lots of African countries. For example, it has 68% market share in largest African motorcycle market, Nigeria. Having said that, Africa is not just a Nigeria story. We have 95% share in Uganda, 42% share in Crimea, 60-65% share in Ethiopia. All these markets put together are as big as Nigeria.

One part of Africa which is not very explored is Francophone part of West Africa (West of Nigeria). There was an issue of trademark in these countries. The company got it resolved 18 months ago but in the meantime competition entrenched a lot here. So can take some time to get growth from here.

Speaking of Latin America and ASEAN, most of the exports here are Pulsars. These markets are now fairly penetrated. Further, worth noting that over 85% of the company’s sales come from 21 countries where Bajaj Auto is either No. 1 or No. 2.

Three-Wheelers:

Bajaj commands extra-ordinary market share in 3W market. They are already super strong in the passenger market. Have recently launched product in Goods Carrier market and it has been seeing tremendous growth. Look at below table for numbers.

Bajaj is also strong in 3W exports as can be see in the numbers. Egypt is a large component of 3W exports. Govt is licensing the three-wheelers in the country and putting a lot of administrative work creating a bottleneck in the industry. However, this is temporary and expected to get resolved by end of 2020. It is good for Bajaj in the long term as the industry gets more organized.

Among 3W Exports,
Africa = 35%
South Asia to Middle East = 50%
Latin America = 10%
ASEAN = 10%

2019 2018 2017 2016
Bajaj three wheeler sales 777603 635852 444462 534995
Bajaj three wheeler market share 61.30% 62.50% 56.70% 56.80%
Passenger carriers (3W) market 1133908 894234 671034 842588
Bajaj passenger carriers sales 745254 612590 431022 533670
Bajaj passenger carriers share 65.70% 68.50% 64.20% 63.30%
Goods carriers (3W) market 134792 122466 112518 99945
Bajaj goods carriers sales 32349 23262 13440 1325
Bajaj goods carriers share 24% 19% 11.90% 1.30%
Bajaj commercial vehicles exports 378777 266215 191236 280000

EVs:

Bajaj is launching EVs through a brand called “Urbanite”. Not much details are available about this right now. They plan to extend this brand to 3W after launching it for 2W.

The Company also plans to setup a separate distribution network for Urbanite instead of re-using the existing distribution network.

Questions / Concerns / Risks:

  1. Over the past few years, when the growth was mainly in Scooters and when motorcycles industry was flat, why didn’t the company consider manufacturing scooters? The company just grew by 25% in a period fo five years, from FY13 to FY18.
  2. RE60 which was hyped so well, just seems to be a dumb product. Poor sales and looks like a poor product as well. Though I tried reading about it, I didn’t understand what market they were trying to address. Maybe we can give it an excuse that it is still new to the market
  3. Is company really expanding its customer base by introducing cheaper categories in Pulsar or diluting its brand in the process? Again, one needs to question if this is a sustainable way to keep growing for the company?
  4. Slashing prices of CT100 aggressively for the market share. One should justify if this is really worth it as CT100 sells at negative margins? One should track if the company can convert these to Platina 110 and if they convert so, will growth falter again for the company?
  5. Though this can vary from person to person, I didn’t like the KMP’s answers during the Conf Call. I felt there is a lot of beating around the bush.
  6. One needs to observe how the company will act when the EV evolution starts to get some kickers / tailwinds.

Financials / Valuation:

You can get the detailed numbers from Screener. Putting down some numbers for starters.
ROCE => 30%+
ROE => 20%+
EBITDA Margins => ~20%
PAT Margins => ~15%
Zero debt + Loads of liquid balance sheet at around 18000 crores of financial investments => They accumulated a lot of cash since no growth over past few years and no capex was needed
Revenue at 31800 crores and PAT at 4900 crores in FY19.

Company is trading at Market Cap of 85000 crores with a P/E of 17-18. Hero, which is competitor, is also trading at a similar P/E of 17-18

Disclosure:

No holdings. Learning about the automotive industry. Please do your own due diligence. All the above content is public information and doesn’t belong to any private entity. Above post is not to be interpreted as a buy / sell recommendation.

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This is very candid interview by owner where he shares lot of insights about market dynamics of auto industries and his past mistakes.
Disclosure: Invested via bajaj holdings

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Just for your information, In one of AGM, Mr. Rajeev Bajaj had told that Urbanite is a project where company will work on solutions for urban transportation.

My guess is the company has been accumulating cash, with little investment in fixed assets. So Net Fixed Assets would fall and Current Assets would rise. Not sure of the exact position now, but the last time I looked at the company, it had more than Rs.500 per share as free cash alone. Reflects poorly on the mindset of promoters, IMHO.

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Before the Covid-19 episode started picking up steam, the Indian auto sector was already suffering from sluggish growth owing to the already slowed down economic landscape . Bajaj Auto however looked relatively less vulnerable to that with a chunk of its revenues coming from the international markets: Exports being the major contributor in deriving higher margins than domestic sales on account of greater pricing power for the company in this segment.

However things have changed drastically in last one month with the rapid propagation of the healthcare crisis globally. This has cast stringent shadows of uncertainties over the entire global business environment . Auto sector will also be impacted badly with already plummeted sales foreseeing worst quarters to follow in terms of sales, thanks to the large scale standstill of economic activities owing to the lock-downs all over the globe.

Bajaj Auto with no exception to that is also starting at lackluster growth for few more quarters to come. Having said that silver lining for Bajaj Auto in such uncertain times could come from the fact that they have been accumulating cash and building the substantial amount of internal reserves over the last few years :

To be able to accumulate free cash consistently and subsequently building the internal reserves as a war chest may prove healthy for the company in the aftermath of the unprecedented crisis like Covid-19. This also indicates the frugality & efficiency with which managements & the promoters are leading the business operations so that more money remains within the company to tackle economic downturns or for investing in time-bound business expansion.

Also when it comes to having a safety cushion, companies with minimal leverage tend to sustain and come out of uncertain times faster than the ones which are duly indebted. Bajaj Auto has been doing well on that front, it is virtually debt-free for almost 8 years now as seemingly visible in the following chart :

There is no doubt that due to lockdowns in place, revival in demand will be a slow process and subdued economic activities are there to stay for a few quarters to come. But with the sustained debt-free status & healthy current ratio as an indication of a stronger balance sheet, coupled with steady annual cash accruals can make Bajaj Auto to keep its competitors’ in check and come out of the current unprecedented situation relatively faster and stronger.

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Bajaj auto Exposure to Nigeria (12% of volumes) which is impacted due to crude fall

Hi, over the past 10 years, cumulative PAT is 34927 cr and cumulative CFO is 29055 cr. Why is company not able to convert it’s accounting profits into cash profits? What am I missing here ?

And another question why is company return on capital continuously decreased over the past 10 years ?

Thank you.

The answer to both your questions is the excess cash on the balance sheet.

  • Income from investment (i.e. cash equivalents + debt mutual funds) is not recognized in CFO but is recognized in investing activities. This is why cumulative CFO < cumulative PAT. If you look at cumulative CFO (29’055 cr.) against cumulative EBITDA (39’581 cr.), that comes to around 73%. A number above 70% (assuming 30% corporate tax) means company is able to convert its operating profits into cash.
  • Over the years, the cash has kept on accumulating going beyond 16’000 cr in FY19. Interest income is lower (<7%) which reduces the overall ROE of the firm.

Here is an excerpt of CFO from the FY19 annual report

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Thanks for answering. A follow up question - What might be the reasons behind company accumulating cash yielding low returns ? No Opportunities available for the company ?

Most companies accumulate cash when they are cash positive & don’t find good enough opportunities to redeploy the cash into expansion, irrespective of their size.
Given the current situation, I am glad the company has sufficient cash to tide over these challenging times.

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Rajiv Bajaj (CEO) has been asked this question multiple; he has always said to ask his father about this. Recently, they have given a large dividend (~4100 cr. including DDT). Why do they still have cash reserves exceeding 10’000 cr.? I don’t know (maybe write to their investment department and let us know).

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Rajiv Bajaj in one of AGM said they will need this cash if some good opportunity at reasonable price comes (e.g. they used it for KTM few years back and were looking at Ducati recently). Also he said cash is good at the time of price wars.

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Yes, accumulating cash to build reserves seems a good ploy especially in these unique uncertain times. With the sudden & unexpected disruption in demand due to the Covid-19 crisis, the automobile sector (which was already struggling to cope up with BS-IV Inventory correction) is staring at poor upcoming quarterly results, with revenues and net profits seems in obvious jeopardy. Although the recent fall in prices of raw materials such as aluminum, lead, natural rubber, and steel seems positive for margins, yet those margins would be under pressure due to cost hike arising out of prolonged supply disruptions.

In such difficult circumstances its always better to be inclined more towards the companies with stronger balance sheets and superiors liquidity profiles, which makes them weathering out of the storm relatively less affected in comparison to its industry peers. When we draw that comparative landscape, we get to know that Bajaj Auto has been nick to nick with its peers over the years, when we take into consideration the major Safety & Performance parameters. However, what stands out for Bajaj Auto on the performance front is its ability to yield much better Net Profit Margins :

As seen in the above chart, when we compare stocks of TVS & Hero Motor Corp with Bajaj auto for net profit margin, we can clearly see that over the years Bajaj Auto has yielded much better profit margins as compared to its peers. This signifies the company’s ability to deliver better operating performance by containing operating costs and overhead costs at optimum levels.

At this point of the global economic downturn wherein every industry is bleeding due to sever consumption fallout, Bajaj Auto can be given due consideration as a relatively better-placed player( by way of its stronger Safety & Performance metrics) when the gradual recovery process eventually kicks in. Superior operating efficiencies yielding better margins and a substantial amount of cash accrued over the years should also help the cause of strategic business expansion over the long term.

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One point to note down regarding Bajaj auto is the write down of investment of INR 199 crores in FY 17-18 in its subsidiary PT Bajaj auto Indonesia whose objective was to spearhead the development of KTM and Bajaj Partnership and bring the jointly products into Indonesia.This has been said in Directors report and notes to accounts -



Provision has been created and written off in P & L account. The reduced investment value has been shown in BS -


And here are the excerpts from the financial accounts of PT Bajaj Auto Indonesia stating that the entire amount of the share capital decrease will be applied to the deficit balance to reduce historical losses.

Note : PT Bajaj Auto Indonesia has been subsidiary of Bajaj auto since 2008.

Disclosure : Tracking

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Another point to note down regarding bajaj auto is their too conservative capital allocation skills.Here are the automotive and investment segments numbers for the last ten years. The investments segment forms part of around 60% - 80% of total capital employed which generated return on capital of around 7%.The autmotive segment has done extremely well but the investment segment has halted its returns
.

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image

Hopefully they are not flattening the wrong curve by shutting the factory. The country needs more bikes for poor folks in India and for exports.

So homeopathy also did not work and resulted in fatality of 2 employees. They have 140 positive cases too.

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Two-wheeler major Bajaj Auto said that its manufacturing facility at Waluj was functional, contrary to rumours that the company had shut it down following some employees testing positive for COVID-19.

Two employees of the company at the Waluj plant, who were suffering from comorbidities have died of the infection.

Source:

They’ve confirmed of 140 cases but have decided to carry on their operations!

A report in Livemint on the topic:

Earlier the promoter claimed that there is no shutdown but now the union is demanding the same. It was inevitable that closed working environment will face this kind of issues. We are too focussed on demand but many companies will start facing supply side issues due to events like this.

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