Bajaj Auto is an Indian company which manufactures motorcycles and three-wheelers. It is the sixth largest manufacturer of motorcycles in the world and second largest in India.
It is also the largest manufacturer of three-wheelers in the world. Bajaj Auto is a public company listed on the Bombay Stock Exchange (BSE) and National Stock Exchange of India Limited (NSE).
Setting the Table:
Before we begin our analysis/valuation of the share target price for Bajaj Auto; it is important to observe the facts, economy, industry outlook, financials, past performance and competitive advantages. After analysis, each section will form assumptions leading to our valuation.
- Bajaj Auto currently manufactures and sell the following models of motorcycles under five brands Dominar 400, V series, Pulsar Series, Avenger Series and CT100.
- The company was founded in the 1940s and has a strong track record with respect to financials and management. It has good dividend paying history and experience in facing stiff competition.
- Bajaj Auto is the second largest manufacturer of motorcycles in India.
- Bajaj Auto is India’s largest exporter of motorcycles and three-wheelers. It has operations in close to 50 countries as of 2017.
- Bajaj Auto had a 25.8% Market share of the Indian motorcycle market in 2016.
- Bajaj Auto owns a 47.96% in Austrian motorcycle maker KTM. It handles the distribution for KTM in India.
- Bajaj Auto owns 24% stake in Force Motors.
- Bajaj Auto follows a brand-centric and differentiation strategy in each of the motorcycle segments (we will discuss this in more detail).
For the sake of simplicity and understanding, I have divided the research into four parts:
- Motorcycle Industry in India and Growth Drivers.
- Performance and Strategy of Bajaj Auto.
- Three-Wheeler business of Bajaj Auto
- Future growth prospects of Bajaj Auto
- Analysis of Financial Statements.
- Valuation (Motorcycle business+three wheeler business + Stakes in KTM and Force Motors)
Motorcycle Industry in India and Growth Drivers:
Bajaj Auto is the second largest manufacturer of motorcycles in India, with a 25.8% market share in 2017. Therefore the growth of the company depends to a great extent on the growth of the industry.
To understand how the motorcycle Industry has shaped up, we need to go back 13 years. This will cover an entire cycle of the economy to overcome any deviations of recessions or boom periods.
The number of motorcycles sold in India has grown from 4.31 million in 2014 to 12.91 million in 2016. This translates in a CAGR (Compounding Annual growth rate) of 9.57%.
|Year||Motorcycles Sales(Exports+Domestic)||Industry Growth Rate|
Even though the CAGR is 9.57%, by looking at the table above it will become obvious to you that the growth of the motorcycle industry has been uneven, ranging from high of 24.41% in 2011 to a low of -7.89% in 2008.
As an investor, this causes uncertainty and difficulties in projecting the growth industry growth rates going ahead which is crucial to understand the stock price value of Bajaj Auto. However, this is also a blessing in disguise as a deeper look will help us understand why there is such a big difference in growth rates over the past 12 years and what factors are causing this.
If you take a look at the industry annual reports, especially on the industry growth, it is a recurrent theme that the management mentions the Economic growth rate (GDP) and Lending rates. Let’s analyze how these two factors have impacted the sales in two wheeler industry.
Assumption 1 : The Motorcycle Industry in India will grow at range between 7-11% CAGR till 2027.
Economic Growth and Motorcycle sales:
The Indian GDP has grown at CAGR of 10.15% for the period 2004-2015, whereas for the period of 2004-2015 the motorcycle industry has grown at 10.56% CAGR. This suggests a strong relationship.
The growth rate of Indian GDP peaked in 2010 at 10.26% and had a low of 3.89% in 2008.
If you compare the GDP growth rate and Motorcycle Industry growth rate as shown in the image below, you will easily observe a co-relation between the two.
Further to this, when you compare the GDP growth rate and Motorcycle Industry growth rate as shown in the image below, you will easily observe a co-relation between the two.
|Year||Industry Growth Rate||GDP growth (annual %)|
As you can observe the drop in GDP growth of India leads to a decline in growth of motorcycle industry. The GDP growth and growth of motorcycle industry is positively correlated with a correlation of 0.62.
Before we jump to the conclusion, there are few questions and discpereincies in the GDP and Motorcycle industry data which need to be understood for better understanding.
Assumption 2 : The motorcycle industry growth rate is dependant on GDP growth rate of Indian Economy. The Indian Economy will grow between 7-9% till 2027 and then at 5%.
Monsoon and Rural Growth:
The majority of the population India lives in rural areas and is dependant on agricultural income. Due the rural population and dependance on agriculture, the growth of the Indian economy is dependant on monsoons each year. Bad monsoon leads to weak rural demand and slow economic growth; this has a direct impact on motorcycle sales in the country. Bajaj Auto has a 25% market share in the motorcycle Industry, and poor monsoon and slow rural growth is a risk to the companies revenues each year.
Let’s now understand how monsoons have impacted the rural demand and motorcycle sales.
Most noteworthy is the fact that the years F.Y. 2015 and F.Y. 2016 have been drought years.During the period 1871-2015, there have 26 drought years.Thus based on this historical data there is an 18.3% probability of drought in India each year
|Year||Industry Growth Rate||GDP growth (annual %)||Monsoons|
Inorder to understand the impact of monsoons and rainfall on the motorcycle industry, allow me to draw your attention to the years of 2009,2014 and 2015. These three years are drought years in the past decade, and the impact is quite noticeable. While GDP grew by 8.48% , 7.18% and 7.93% ; the industry grew only at 4.13% , 4.27% and 4.33% in 2009,2014,2015.
The correlation between motorcycle sales and becomes negative at -0.59 vs. positive 0.6 if you take all years in consideration.
Assumption 3 : Sales of Motorcycle Industry and Bajaj Auto are impacted each year by monsoons and purchasing power of rural economy. There will be atleast 2 drought years in the next 10 years.
The Impact of lending rates:
Another factor which impacts the motorcycle industry growth rates is lending rates. The ability of people to purchase motorcycle depends to a great extent on the availability of loans at low-interest rates.
Each year the Reserve Bank of India (RBI) sets interest rates based on the growth of the economy. If the RBI feels the economy is slowing down, it reduces interest rates to revive demand, on the other hand, if the Reserve Bank of India feels the economy is growing too fast or over-heating it increases interest rates. The interest rates have a direct impact on the ability of consumers to take auto loans and buy motorcycles. An increase in interest rates makes auto loans and affordability of motorcycles expensive; Conversely, a decrease in interest rates makes auto loans and affordability of motorcycles cheaper. Therefore both these actions of increase or decrease in interest rates also affect the growth rates of the motorcycle industry.
Assumption 4 : Sales of Motorcycle Industry and Bajaj Auto are impacted each year by level of interest rates.
Interplay and Impact of all three forces on Motorcycle Industry:
The motorcycle industry is affected by three factors Monsoons, GDP growth, nd interest rates.To help you understand this better , i urge you to look at the table below. Lets analyse each year further.
Lets analyse how this has impacted the industry.
Note : In the table below , I have used the upper limit of interest rates in the respective year and period from 2007-2015 because of data availability.
|Year||Industry Growth Rate||Lending Rates||GDP growth (annual %)||Monsoons|
- 2008 – The year 2008 sees a drop in GDP growth to 3.89% from 8.61% in 2007 , there is also an increase in interest rates to 14.75% in 2008 from 12.75% in 2007 resulting in decline in motorcycle industry growth rate to -7.89%. The monsoon was normal. The decline in motorcycle industry growth is mainly due to low GDP growth and increase in interest rates.
- 2009 – The year 2009 sees a rise in GDP growth to 8.48% from 3.89% in 2008 , there is further increase in interest rates to 15.75% in 2009 from 14.75% in 2008 resulting in revival in motorcycle industry growth rate to 4.31%.The monsoon was poor and it was declared a drought year. The increase motorcycle growth is mainly due to increase in GDP growth but did not match GDP growth rate because of poor monsoons and higher interest rates.
- 2010 – The year 2010 sees a rise in GDP growth to 10.26% from 8.48% in 2007 , there is further increase in interest rates to 16.75% in 2010 from 15.75% in 2009 resulting in a industry growth of 23.94%. The monsoon was normal. The The increase motorcycle growth is mainly due to high increase in GDP growth and normal monsoons.This two positive factors overshadowed the high interest rates at 16.75%.
- 2011 – The year 2011 sees a decline in GDP growth to 6.64% , there is a decline in interest rates to 15.75% from 16.75% in 2010 resulting in a industry growth of 24.41%. The monsoon was normal.The increase motorcycle growth is mainly due to decent increase in GDP growth , reduction in interest rates and normal monsoons.
- 2012- The year 2012 sees a further decline in GDP growth rate to 5.48% , there is a massive delcine in interest rates to 9.50% from 15.75% resulting in an industry growth rate of 13.71%. Even though the GDP has slowed down, the Increase motorcycle growth is mainly due to massive reduction in interest rates and normal monsoons.
- 2013- The year 2013 sees an increase in GDP growth rate to 6.54% , there is an increase in interest rates to 10.75% resulting in an industry growth rate of only 0.08%. The monsoon was normal. The reason for such a low industry growth rate is very little increase in GDP and hike in interest rates by 1.25%.
- 2014 – The year 2014 sees an increase in GD growth rate to 7.18%, there is decline in interest rates to 10.25% resulting in in an industry growth rate of 4.27%. The monsoon was poor and it was declared a drought year. The increase motorcycle growth is mainly due to increase in GDP growth but did not match GDP growth rate because of poor monsoons and higher interest rates.
- 2015- The year 2014 sees a marginal increase in GD growth rate to 7.93%, there is no change in interest rates resulting in in an industry growth rate of 4.33%.The monsoon was poor and it was declared a drought year. The increase motorcycle growth is mainly due to increase in GDP growth but did not match GDP growth rate because of poor monsoons and higher interest rates.
Performance and Strategy of Bajaj Auto:
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Now that we have understood the factors which affect motorcycle industry growth in India ; the next question we need to answer in our analysis is :
How has Bajaj Auto performed revenue and sales wise over the years compared to the industry ? and why ?
In the below table are the details on number of units sold by Bajaj Auto and its growth rates
|Year||Industry Sales (Million)||Industry Growth rate %||Bajaj Auto Sales (Million)||Bajaj Auto Growth Rate %|
|2004||4.31||Base Year||1.02||Base Year|
The motorcycle sales of Bajaj Auto (domestic+exports) have grown from 1.02 million in 2004 to 3.34 million in 2016, sales have grown at 10.39% CAGR.
The industry sales have grown from 4.31 million in 2004 to 12.91 million in 2016, the CAGR is 9.57%.
Thus the growth in the number of units sold of Bajaj Auto has grown faster than that of Industry.Bajaj Auto has outperformed the industry growth over the years.
However, if you observe closely the sales growth of Bajaj Auto has been inconsistent over the years. A closer look will help us gain more insights into the company and its strategy.
|Year||Industry Growth rate %||Bajaj Auto Growth Rate %|
|2004||Base Year||Base Year|
In Years 2005, 2006,2007,2010 and 2012; when the industry has experienced positive growth, the sales of the Bajaj Auto has grown much faster than that of the industry.
In Years 2008, 2009,2013, 2014, 2015 and 2016 ; when the industry has registered a de-growth, with , sales of Bajaj Auto have been impacted negative much more than that of the industry.
Another parameter to look at is the market share of Bajaj Auto over the years. The market share of the company has increased from 23.67% in 2004 to 25.87% in 2016.
|Year||Industry Growth rate %||Market Share%||Change in Market Share %|
|2004||Base Year||23.67||Base Year|
Bajaj Auto has managed to gain market share in 2005 , 2006 , 2007 , 2010 and 2011. All these years have been double digit growth or boom period for the industry.
On the other hand in recession years or single digit growth years of 2008, 2009, 2012 , 2014 , 2015 ,the company has lost market share.
The year 2016 , industry growth is close to zero and Bajaj Auto has maintained market share with a marginal increase.
Assumption 5 : Bajaj auto will outperform industry sales growth in boom years and it will underperform the industry in recession years due to its focus on the premium segment of the market.
Bajaj Auto strategy and brand strength:
In order to understand the gain and loss in market share of Bajaj Auto over the years; you need to understand the strategy adopted by the company.
The company has a brand-centric and differentiation strategy. The management has divided the market into 4 segments :
- The high performance segment: This includes motorcycles in the engine class of 150 cc and above. Bajaj Auto competes here with the Pulsar range and Avenger DTS-i. 2.
- The 125 cc segment: Bajaj Auto competes in this category with Discover DTS-i 125 and the recently launched Discover DTS-i 135. 3.
- The 100 cc segment: Here, Bajaj Auto competes with the Discover 110, Platina and the CT-100.
- Super sports segment where it operates under the KTM , Dominar and Pulsar Rs 200 brands.
In my view Bajaj is focusing its resource on the 150 cc + and 125cc segment , with a strong focus on product differentiation and its product brands since 2007. This explains the loss in market share when industry faces downturn and gain in market share when industry is growing fast. The main reason is when people have more disposable income they either prefer to buy or upgrade to premium motorcycles.
The strength of any brand can be measured in 2 ways.
Does it have a higher market share than the competition ?
As discussed before , In 2016 Bajaj Auto had a market share of 25.87%. However the average market share of the company for the past 13 years was close to 30%.
In the high performance segment , Bajaj Auto had a market share of 49% in Q4/FY2016.
Super sports segment with KTM , Dominar and Pulsar 200 it had a market share close to 60% in FY2016.
And in the entry or utility segment with CT and the Platina it had market share of 35% in FY2016.
Does it have a higher profit margin than the competition ?
The PBIT (the profit before interest and taxes) is a good measure of the profitability of the company.
|Company Name||Bajaj Auto||TVS||Hero Motocorp|
|Operating profit margin %||21.07||6.68||15.55|
The operating profit margin of Bajaj auto is close to 21% compared to 6.66% for TVS motors and 15.55% for Hero motocorp.
This again validates Bajaj Auto’s strategy of focusing on premium segments of the motorcycle market.
The management has been successful in creating a good consumer brand and product differentiation leading to high market share in few segments and higher operating profit margin.
Assumption 6 : Bajaj will be able to maintain a 30% average market share in the next 10 years.
Three-wheeler Business of Bajaj Auto:
Bajaj Auto is the largest manufacturer of three-wheelers in the world.
The threewheeler industry has grown at CAGR of 9.12%% for a 12 year period , indsutry sales were 0.33 million in 2004 and 0.94 million in 2016 (domestic+exports).
As of 2016 , Bajaj auto commands a 56.8% market share in the three-wheeler industry. The total industry sales (units) were 0.94 million in 2016. Bajaj sold 0.53 million units in 2016 (domestic+exports).
Bajaj Auto had a market share of 68.5% in 2004 and has lost market share since then.
The three-wheeler sales of Bajaj auto have grown at 8.93% in the 12 years period. It has sales of 0.19 million in 2004 and 0.53 million in 2016.
Assumption 7 : The three-wheeler industry is a mature market and sales of Bajaj will grow at the same pace of the GDP.
Future Growth Prospects of the company:
In my view the growth of Bajaj Auto depends on 3 factors:
- The growth of the Indian motorcycle industry (domestic + exports).
- Ability of Bajaj Auto to retain and growth market share.
- The ability of management to launch new models quickly into the market.
Qute – Quadricycle: Bajaj auto introduced its quadricycle called Qute in 2012. It has been faced by legal issues since then in India. Bajaj has begun exporting it to few countries. This product can be a Game-changer as it could potentially disrupt the three-wheeler market , however, there is a lot of legal uncertainty surrounding this. A
Note: You must note that we have treated the Qute’s potential using option pricing in our stock recommendation valuation
Analysis of Financial Statement:
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Bajaj has a strong financial track record, with a strong management in place. The company earns close to 31% return on equity (PBIT/Shareholders funds). The sales to capital ratio is 1.77. The company is debt free and has neglible debt on the books. The company has dividend payout ratio of close to 42% indicating that the business has matured.
Bajaj Auto has experienced a decent growth rate of 11.07% CAGR in revenues over the past 10 years (2006-2017).The revenues in 2017 were impacted by one-time events of BS-3 engine ban and demonitisation.
If you compare the revenue growth rate of 11.07% to the industry sales (units) growth rate of 7.61% for the period 2006-2017 (10 years). The year 2017 was affected due to demonisation and BS-3 engine ban. The growth in revenue is revenue over the years which is faster than the industry unit sales growth, can be attributed primarily to Bajaj Auto’s strategy to focus on its brand offering and product differentiation. Therefore the company has been able to pass on inflation cost and has some pricing power.
Assumption 8 : Revenue of Bajaj will grow between 10-15% CAGR for next 10 years.
As of 2017 the PBIT (Profit Before Interest and Taxes) of Bajaj Auto is 23.20%. This is the highest in the industry again resonating with Bajaj Auto’s pricing power, focus on brand building and product differentiation.The profit margins of the auto industry depend on steel prices as well and a surge in steel prices can be a potential risk to profit margins.It must be noted that cost of material constitutes close to 60% of total sales cost.
Assumption 9 : Due to its strong brand Bajaj will have a higher PBT (Profit before tax) margin compared to competition. Steel price have an impact on profit margins and PBT margin will range between 15-23% in next 10 years.
In order to maintain and grow its revenue in the future. Bajaj Auto will need to reinvest its earnings in three things: manufacturing capacity, research & development, and advertising.As of 2017 Bajaj Auto has a return on equity of 31% which is quite high and signifies that its strength lies in intangible assets like brand and research capabilities. we estimate that Bajaj auto will spend close to 2% of its net revenue on capacity expansion each year.
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Almost always as is the case with predicting future earnings, there are many possible outcomes. Therefore a scenario analysis is important. After considering all factors our valuation reflects Average Per Share value of 3047 Rs per share with a company valuation of 84,461 Crores INR. A range of 2294 to 3962 Rs per share value was discovered as a result of conducting scenario analysis on our assumptions.
Note*: Our valuation includes 49% stake owned by Bajaj Auto in KTM and 24% in force motors.
Stock Recommendation for Bajaj Auto:
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The current market price of 2800 Rs as against the valuation of 3047 per share.Therefore we feel that Bajaj Auto is –undervalued valued by close to 10% which is a decent margin of safety as value investor in a mature company. In conclusion – A long term investor can start buying at current levels of 2800 Rs and keep adding if the share price goes down in the short run. The time horizon will be 1 year. Please remember if price of Bajaj Auto moves down to 2200-2400 levels it becomes a very good long term opportunity with upside of close to 30-40%.
Please note that the valuation will be updated each quarter. As also will any news impacting any of the assumptions or factors in Bajaj Auto’s target price and valuation.so STAY TUNED.