Tag - BS-VI

23 Sep

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 The surcharge on capital gains made on equity that was announced in the Budget has also been withdrawn.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/-
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28 Aug

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.

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