Bajaj Auto Ltd – OATS may eat BET’s Cake

Updated: Jun 9


Company Name – Bajaj Auto Limited (Bajaj)


Current Share Price – INR 3,726 (Nov 1, 2021)


Market Cap – INR 107,822 cr


 

1. What is interesting about the stock?

I have fond memories of Bajaj. I had used the ever reliable Bajaj Chetak to reach JEE examination center, braving the heat wave in Kota. This was late 90s – younger crowd can see Yeh Meri Family from TVF to live through that period. Rolling further back, I am now talking about 80s when the scooters were sold in black and Chetak commanded highest premium. Brand is rock solid in the mind of Indians with not-so-young associating it with Chetak scooter and young with macho Pulsar motorbike.


But then what happened – why has the stock under-performed the indices in last 10 years. Company was slow to embrace change in the 90s when two wheeler market shifted from scooters to motorbike and the market leadership went to Hero Honda (now called Hero Motocorp after their split with Honda). That was the first mega shift in the 2Ws market and now the second one is coming with electric 2Ws. History seems to be repeating itself:


  • Bajaj has launched Chetak electric scooter – selling paltry c. 400-500 units on a monthly basis vs 100,000 bookings received by Ola in 24 hour period

  • Management is taking dig at EV startups rather than getting serious like the recent comment on OATS (Ola, Ather, Tork and SmartE) and BET (Bajaj, Enfield and TVS) – in the world where industries are getting disrupted at breathtaking pace.. all incumbents need to be grounded and humble!


What’s the big deal about electric 2Ws?


Market like China has seen sharp uptick in the electric 2W sales – now it accounts for more than 50% of the overall market. Agreed that Indian market is different from Chinese market, but we may still see big gains in the metro or cities – especially when petrol price is north of INR 100 & oil prices are expected to further firm up in the near term.


Another parallel is happening in US market where Tesla is marching ahead of its competition. Ola seems to be copying Tesla’s playbook:


  • Direct sale to the customer (not through dealer network)

  • Set-up mega factory – significantly bigger than competition. Tesla has also set-up giga factories to drive economies of scale

  • Marketing and selling process similar to a mobile phone (Apple iphone) – customization & color options

Based on Telsa's experience, Ola can put stiff challenge to the existing players and change the industry dynamics.


Hero Motocorp has investment in Ather Energy (one of the leading EV 2W start-up) apart from owner family’s exposure through Hero Electric.


Market Size and Competition


India’s two wheeler domestic market was c. 20 million units in 2020 and is expected to grow 6-8% in next 5 years with increase of c. 10-12% in 2021 (reversal of COVID19 impact). Hero Motocorp is the market leader with 36% market share with Honda & TVS at number 2 & 3 and Bajaj is number four player with market share of c. 12%. Motorcycle, scooter and moped split is 64%, 32% and 4% respectively.


Strengths and Weakness of Bajaj


Key strengths of Bajaj are:


  • Strong brand name – company has been able to pass on significant increase in commodity

  • Healthy market position in the motorcycle segment – market share of 17%; higher market share in bikes above 150cc

  • Leadership position in exports (2W and 3W) – market share of 59.6% in motorcycles

  • Robust financial profile – cash position of INR 15,500 cr


Key weakness of Bajaj are:


  • Weak position in electric 2W market

  • Increasing competition in premium motorcycle segment (above 150cc)


2. Key Historical Financials



3. What is my view on company valuation?


Bajaj currently trades at EV/EBITDA (TTM) ratio of c. 17.8x and P/E (TTM) ratio of c. 13.7x. That seems reasonable in the current market scenario!


Competitors like Hero Motocorp and TVS trade at EV/EBITDA (TTM) multiple of 11-15x. So, Bajaj trades broadly inline with the competition.


Assuming that Bajaj maintains the market share and margins, the EPS will grow by 6-8% in next few years implying PEG ratio of 2.8 which is fine as the company has high ROE/ROCE and has negative working capital.


So, on an overall basis, the valuation looks reasonable – but does not factor risk of losing market share from the electric 2W start-ups.


4. What are the risks to the investment analysis?


Biggest anchor in the analysis is Bajaj’s weakness in electric 2W segment. Any outperformance on this element is key risk to the analysis:


  • Electric 2W will take some time to stabilize (delay will be positive for Bajaj)

  • some of the batteries have had fire issues

  • large charging network needs to be established

  • high entry price – dependent on subsidy to make it viable

  • Bajaj has been working on electric 2W R&D – good product launch at a reasonable price can do wonders (example – Tata Motors)


About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


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