Company Name – Bajaj Auto Ltd (Bajaj) Current Share Price – INR 3,849 (July 11, 2022) Market Cap – INR 111,364 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 the late 90s – the younger crowd can see Yeh Meri Family from TVF live through that period. Rolling further back, I am now talking about the 80s when the scooters were sold in black and Chetak commanded the highest premium. The 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 underperformed the indices in the last 10 years. Company was slow to embrace change in the 90s when the two-wheeler market shifted from scooters to motorbikes 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. ~1500 units every month vs top 3 selling more than 6,000 units
Management took a 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 a breathtaking pace.. all incumbents need to be grounded and humble! Of late, we are seeing a change of stance by Bajaj with an investment of INR 300 cr announced in December 2021 and
What’s the big deal about electric 2Ws?
Market like China has seen a sharp uptick in electric 2W sales – now it accounts for more than 50% of the overall market. Agreed that the Indian market is different from the 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 the US market where Tesla is marching ahead of its competition. Ola and other start-ups seem to be copying Tesla’s playbook:
A direct sale to the customer (not through dealer network)
Set-up mega factory – significantly bigger than the 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 and other start-ups can put a stiff challenge on the existing players and change the industry dynamics.
Hero Motocorp has an investment in Ather Energy (one of the leading EV 2W start-ups) apart from the owner's family’s exposure through Hero Electric. Hero MotoCorp has announced an investment to launch their EV and TVS has already launched an EV to compete in the market.
India’s two-wheeler domestic market was c. 20 million units in 2020 and is expected to grow 6-8% in the next 5 years with an increase of c. 10-12% in 2021 (reversal of COVID19 impact). The market fell in FY22. Bajaj domestic sales fell in FY22 but were compensated by a significant jump in exports.
Company's domestic 3W retail market share is at 70% which is highest ever with leadership across every segment namely passenger and cargo and large and small formats. The market share in CNG (incl. Passenger and Cargo) at 77%. Bajaj's electric 3W (E3W) is expected to be launched in June 2022 in a limited way. Management expects E3W to gain share from CNG 3W in next 3-5 years.
Strengths and Weaknesses of Bajaj
Key strengths of Bajaj are:
Strong brand name – company has been able to pass on a significant increase in commodity
Healthy market position in the motorcycle segment – market share of 20%; 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 and investment position of ~INR 25,500 cr
The key weakness of Bajaj are:
Weak position in the electric 2W market
Increasing competition in the premium motorcycle segment (above 150cc)
2. Key Historical Financials
Company showed strong growth in FY22 vs FY21 due to a very poor sales number in Q1FY21 (COVID-19); volume jumped in FY22 on back of higher exports
Margin fell in FY22 on high commodity prices but recovered in Q4FY22 when Bajaj did price hikes to pass some of the increase
Cash Flow Convertibility (CFO/EBITDA) is healthy with WC being negative
ROCE and ROE are also quite robust
3. What is my view on company valuation?
Bajaj currently trades at an EV/EBITDA (TTM) ratio of c. 16x and a P/E (TTM) ratio of c. 20.5x. That seems reasonable in the current market scenario!
Competitors like Hero Motocorp and TVS trade at EV/EBITDA (TTM) multiple of 15-20x. So, Bajaj trades broadly in line with the competition.
Assuming that Bajaj maintains the market share and margins, the EPS will grow by ~10% in the next few years implying a PEG ratio of 2 which is fine as the company has high ROE/ROCE and has negative working capital.
So, on an overall basis, the valuation looks reasonable – success of its electric vehicle can make or break the investment case. Current offering (electric Chetak) is priced at ~ INR 1.5 lakh which is too expensive vs competition (Hero Electric) and majority of target segment.
4. What are the risks to the investment analysis?
The biggest anchor in the analysis is Bajaj’s weakness in the electric 2W segment. Any outperformance on this element is a 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 – a 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 the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the 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 in the 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.