Analyst corner: ‘Neutral’ on Bajaj Auto over expected BS VI turbulence

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Published: July 4, 2019 1:24:31 AM

The company believes the domestic market will get more competitive across various segments, as it expects segmental quasi-monopolistic control to end.

Bajaj Auto, BS VI turbulence, Bajaj Auto annual report, key export markets, market newsBajaj Auto expects BS VI to be the joker in the pack; there is risk of a price war if BS IV inventory is high in H2FY20.

Competitive intensity to remain high; watch out for action in ‘commuter’ segment. Our analysis of Bajaj Auto’s FY19 annual report highlights the company’s strategic intent, update on the key export markets and outlook for the 2W industry. Bajaj Auto expects BS VI to be the joker in the pack; there is risk of a price war if BS IV inventory is high in H2FY20. It plans to comply with BS VI norms earlier than the deadline.

The company believes the domestic market will get more competitive across various segments, as it expects segmental quasi-monopolistic control to end. While it expects the ‘entry’ and ‘premium’ motorcycle segment to grow, it is currently focusing on cracking the code for the large ‘commuter’ segment. In exports, it aspires to become a true global motorcycle specialist by getting into the ‘consideration set’ of a customer looking to buy motorcycles in any part of the world. India is now the biggest market for KTM, driven by the launch of the Duke 125.

The company’s FY19 annual report reinforces its focus on market share and its willingness to compete in the domestic motorcycle segment to gain share. The strategic shift — of prioritising market share over margin — is reflected in a substantial market share gain in domestic motorcycles (300 bps in FY19), albeit at the expense of margins (270 bps decline in FY19). Post the recent run-up in the stock price, its valuations at 17.1x/15.5x FY20/21 consolidated EPS is a fair reflection of the tepid earnings growth expectation (6% CAGR over FY19-21E), especially considering the expected turbulence due to BS VI transition. Maintain ‘neutral’. It expects BS VI to be the joker in the pack due to restrictions on sale of BS IV vehicles from April 1, 2020. It plans to comply with BS VI norms some months earlier than the deadline. But, a price war could break out while clearing the BS IV vehicle inventory. Hence, the company expects near-term outlook to remain healthy, as long as there are not too many major market disruptions on account of BS VI.

It expects the domestic market to get more competitive across various segments, as it expects the segmental quasi-monopolistic control to end. It expects to compete through its operational nimbleness and cash surplus of over Rs 16,000 crore.

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