Bajaj Auto
23-03-2022

Bajaj Auto Ltd. | Market Cap: 1,05,000 Cr

CMP: 3,605 | 13.5 FY23 EV/EBITDA

Industry Overview

The Indian 2 wheeler industry comprises of players manufacturing motorcycles, scooters and mopeds in IC Engine (ICE) and electric (EV) versions. Prominent players in the space include Bajaj Auto, Hero Motocorp, TVS Motors, Honda, Eicher Motors, Suzuki.

Motorcycles have dominated the industry volumes for a long time; however, EV’s, scooters and mopeds (other two wheelers) are gaining traction at a faster pace.

Source: Bajaj Auto Ltd. Annual Report

Source: SIAM, Hero Motocorp

India has recently overtaken China to become the world’s largest two-wheeler market. This is mainly due to lower penetration of two-wheelers leading to faster growth rate as compared to China. The two-wheeler sale in India has grown at a CAGR of 8% during from FY14 to FY18 period.

Source: CMIE, Jefferies

Two-wheeler (2W) as compared to four-wheelers has historically been steady growth industry with limited cyclicality as it is core to India mobility offering the cheapest mode of personal commute and a proxy to sub-par public transport. In last 45 years from 1975 to 2019, year on year 2W demand declined only in four instances and fell double-digit just once.

Source: Company Data, MoneyWorks4me

The above chart shows the segment based volume for key listed players. As seen in the chart, Hero predominantly is present in the domestic sub 125cc segment, while Eicher is placed in 125+ cc and export segment.

About Bajaj Auto

Bajaj Auto was incorporated in 1945 as Bachraj Trading Corporation Ltd to import scooters and motorised three-wheelers from Piaggio & Company. The entity’s name was changed to Bajaj Auto Pvt Ltd in June 1960, and then to its current one in August 1960, after it was reconstituted as a public limited company. Currently, Bajaj Auto has a dominant market share in the three-wheeler segment, and a strong position in the motorcycle segment.

The company has an assembly line capacity in its Waluj plant in Aurangabad, Maharashtra, to manufacture quadricycles (branded as Qute), which it started exporting apart from catering to the domestic market. Bajaj Auto has a total capacity to manufacture 54 lakh units of motorcycles and 9.3 lakh units of commercial vehicles (passenger carrier, goods carrier, and quadricycles) at its plants in Waluj and Chakan in Maharashtra; and Pantnagar in Uttarakhand.

Business of the Company

Bajaj Auto has presence in 70+ countries. 85% of the company’s sales come from 21 countries where Bajaj Auto is either No. 1 or No.2 .  Its key markets are - Africa, Latin America, South Asia to Middle East and ASEAN countries. The company has made a mark through its Pulsar brand in Indian 2W industry. In Indian markets, Pulsar brand forms more than 50% portion of its 2W volumes. And within that, 125cc Pulsar is ~34%.

Segment share of Bajaj Auto in the 125cc motorcycle market has grown from 2% in FY19 to 19% in FY21 and 28% in Q1FY22.

Export gives Bajaj Auto a meaningful hedge to the price sensitive Indian domestic market. Africa drives majority exports for BAL where its Boxer model has dominance. It has 68% market share in largest African motorcycle market, Nigeria. Other competitors in Africa are mainly Chinese and Japanese. In export market, Boxer is a dominant brand with 66% of export volumes.

The company has been increasing its focus on premium bikes. Hence, it has acquired an Austrian brand KTM. Over the past few years, the company has demonstrated robust product development capabilities, as reflected in model launches under the KTM, and Husqvarna brands in the premium segment.

Another high margin business for the company is its spares and 3Ws. 3Ws, Spares and exports are high margin businesses which form 76% of its annual sales, partially offsetting the low margin domestic business which is low margin to due competitive intensity and price sensitive consumers.

On EV front, BAL has planned to spend Rs 10bn over next five years on EVs.  It will be expanding it annual capacity from 60K currently to 500K units with start of production by Jun'22. Bajaj Currently has only one product offering – Chetak, but plans to expand product availability across India in 2022. It has plans to launch an electric 3W in FY22.

Bajaj Chetak EV

Financials

Financials of Bajaj Auto display the company has a debt free balance sheet and its free cash flow  is one of the best in the industry. The company has a low capital intensive business model where it has generated sale of Rs. 30,000 cr on an asset base of less than 2,000 crores.  

It has cash and investments upwards of 20,000 crore on its books which gave the business a downside protection in the pandemic hit years of FY20 and FY21. Being an established OEM, it can maintain a narrow working capital cycle. This also helps BAL to maintain its net profit margin in the range of 13%-15%

Positives

• The company has a healthy market position in the motorcycle segment and ownership to key brand in this segment
• The company is a leader in the three-wheeler passenger carrier segment. It is the single-largest player in the domestic three-wheeler segment, with a market share of ~50% in FY21 and largest exporter of three-wheelers, with a 65% share in same period.
• Robust financial risk profile with near debt-free balance sheet and cash.
• Fast growing under penetrated key export markets depict long term demand visibility. Sales are growing fast in Africa and in the Latin America.
• Excise duty cut on 2 wheelers is a long standing demand from Federation of Automobile Dealers Association (FADA) and 2W OEMs. Currently excise on sub 350cc 2 Wheelers is 28% and that on 350cc+ is 31%. A key monitorable for demand revival

Risks

• Economy segment accounts for 54% of the domestic motorcycle volumes in FY21 but Bajaj Auto has a modest presence in the economy segment and absence in scooter segment.
• Heavy competition from 12 players, including Honda, Hero and TVS Motors Ltd.  in a single digit growth market can limit the profitability.
• Bajaj has limited presence in the EV space with just one model in the segment and faces risk of lagging behind new age electric vehicle OEMs
• High dependency on Pulsar and Boxer sales which form almost 65% of its total volumes