Bajaj’s growth is limited by weak export markets despite obvious long-term opportunity. Domestic motorcycle share has increased recently but we aren’t confident of sustainability. Three-wheelers face multiple structural challenges from cab aggregation and e-rickshaws. But strong cash flows and RoE provide valuation comfort. Maintain hold.
Domestic motorcycles improve: On the back of new launches, Bajaj’s share has gained 90 bps share (to c18.7%) in 1HFY17. However, we worry that the strategy of gaining share through multiple new launches results only in transitory gains. After rapidly rising, the new models (V15, Avenger) have stagnated recently. Upcoming launches in the premium segment could provide some upside to shares but not meaningfully. We forecast c10.3% volume growth in FY16-19e. On the other hand, exports remain weak due to problems in end markets and will remain challenged for a few quarters more.
Three-wheelers—structural issues? While domestic volume has been strong YTD, we believe 3-w is facing rising challenge from growth in cab aggregators across the country (for long distance rides) and from e-rickshaws (for short distance rides) in North India. By end FY17e, there would be c1 m cars with car aggregators and c1.5 m e-rickshaws — none existed 5 years ago. While it’s hard to predict short-term volume due to the nature of demand, we think the case for segmental growth is minimal (flat vols in Fy17-19e). Domestic 3-wheelers account for c15% of profits. Exports are weak too.
Margins, a currency play: Bajaj’s margins have held up strongly due to favourable currency moves in the last 4 years. However, underlying profitability is not so strong. With falling share of exports (43% of revenues in FY15 to 34% in FY19e) and forecast weakness in three-wheelers, margins have limited upside. We tweak our model and raise FY17-18e by 1-2% and introduce FY19e. Our estimates are c8% lower than consensus.
Despite all the business pressures highlighted above, we like Bajaj’s cash flow characteristics and capital light model. High RoEs provide valuation support. We marginally raise our DCF based target price to R2,743 (R2,718 earlier) and maintain Hold. Currency remains the key risk.
Bajaj Auto is the second-largest player in the Indian two-wheeler industry. Apart from motorcycles, the company manufactures threewheelers and is the market leader in the passenger segment. Bajaj Auto has a significantly large export business.