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Neutral Bajaj Auto, target Rs 2,988: Motilal Oswal Securities

The brokerage has set a one-year horizon for the stock to hit the target price.

ETMarkets.com|
Updated: Jul 03, 2019, 02.37 PM IST
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The brokerage has lowered its volume estimates by 1.5-2.5 per cent for FY20E/21E.
Motilal Oswal Securities has a neutral view on Bajaj Auto (BJAUT) with a target price of Rs 2,988.

Shares of Bajaj Auto traded at Rs 2,906 around 2:15 pm on 3 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

View of the brokerage-

BS6 could influence outlook for domestic 2Ws
The company expects BS6 to be the joker in the pack due to restrictions on sale of BS4 vehicles from 1st Apr’20.

As per the brokerage, BJAUT plans to comply with BS6 norms some months earlier than the deadline. But, price war could break out while clearing the BS4 vehicle inventory, especially if competitors are saddled with high BS4 inventory levels in the second half of FY20. Hence, company expects near-term outlook to remain healthy, as long as there are not too many major market disruptions on account of BS6.

Expects heightened competitive landscape
BJAUT expects the domestic market to get more competitive across various segments, as it expects the segmental quasi-monopolistic control to end.

BJAUT expects to compete with such competition through its operational nimbleness and cash surplus of over Rs 16,000 crore. Also, its diverse presence across exports and 3Ws makes it less prone to acute competitive pressures of the domestic market, with success dependent on its ability to have new and exciting models.

Entry & Premium segment to grow; Focus on winning in Commuter space
BJAUT expects growth in the ‘entry’ (driven by 1st time buyer) and ‘premium’ segments (driven by young people with purchasing power), with the company maintaining leadership position in both segments.

In FY19, BJAUT not only played a key role in growing the entry segment, but also captured greater market share in doing so. In the large commuter segment, BJAUT’s focus is to systematically introduce appealing, sporty yet fuel efficient models, filling the segment with more exciting and attractive alternatives.

Domestic 3Ws getting strong grip on overall market
In domestic 3Ws, BJAUT has not only maintained its dominance in petrol/alt. fuel (nearly 86 per cent share) and small diesel (nearly 80 per cent share) market, but it has gained market share in other segments as well.

In large diesel, it has gained nearly 200bp market share to 26 per cent, while it has 24 per cent market share in the goods carrier business, which it entered three years ago.

In FY19, it launched the quadricycle QUTE in four states (Kerala, Gujarat, Odisha and Rajasthan); launch in other states is expected in FY20.

Exports- attaining new milestones; optimistic about FY20 outlook
In FY19, BJAUT achieved record exports of 20 lakh vehicles (up 25 per cent). It is now present in 79 countries, ranked either No.1 or No.2 in 21 countries.

In motorcycle exports, growth was led by the recovery in Egypt and Bangladesh, good demand in Africa and the Philippines, stable volumes in LatAm (despite macro issues in Argentina and Mexico), and entry into new markets.

On the other hand, 3W volume growth was driven by recovery in large traditional markets, such as Egypt and Nigeria, as well as strong growth in new markets, such as Cambodia, Iraq, Myanmar and Nepal.

New markets (entered in last four years) grew nearly 73 per cent as against 3W export growth of nearly 43 per cent. The company is optimistic about exports in FY20 as it intends to further strengthen its competitive positioning and invest in new markets and categories.

KTM- India is now the largest market; Sales/PAT grew nearly 9 per cent/14 per cent in CY18
In FY2019, KTM sold over 50k units in India, making India the largest market for KTM worldwide (overtaking USA).

This was enabled by the launch of ‘Entry’ level Duke 125 in 3QFY19, which played a strategic role in bringing new customers into the franchise. It continued to strengthen its network and now has 460 showrooms in India — the largest network for any premium sports motorcycle brand.

Calendar year 18 was another record year for KTM with highest ever global sales at nearly 212k units (up 11 per cent), revenues of nearly EUR1.45 billion (up 9 per cent) and PAT at nearly EUR90 million (up 14 per cent).

In CY18, KTM sourced nearly 47 per cent of volumes from BJAUT.

Taking TPM to next level
Bajaj Auto now has a ‘first-in-the-industry’ status of having all its manufacturing plants certified for 'special award for TPM achievement' by Japan Institute for Plant Maintenance (JIPM).

In FY20, its Chakan plant will be challenging the 'advance special TPM award', which is a step away from being recognised as 'world class' by JIPM. It continues to extend Total Productive Maintenance (TPM) across the value chain with both vendors (Tier-1 & Tier-2), as well as dealers practicing TPM.

Valuation
BJAUT’s FY19 annual report reinforces its focus on market share and its willingness to compete in the domestic motorcycle segment to gain share.

It has already garnered nearly 300bp market share led by aggressive product and pricing actions in the ‘entry’ and ‘premium’ segment.

"We believe it would replicate same aggression for the large ‘commuter’ segment, where it has weak presence (less than 2 per cent market share)," the brokerage said.

BJAUT’s strategic shift—of prioritizing market share over margin – is reflected in substantial market share gain in domestic motorcycles (nearly 300bp in FY19), albeit at expense of margins (nearly 270bp decline in FY19).

The brokerage has lowered its volume estimates by 1.5-2.5 per cent for FY20E/21E, leading to lower margins and earnings, and has trimmed EPS by 2-3 per cent for FY20/21E.

Post the recent run-up in the stock price, its valuations at nearly 17.1 times/15.5 times FY20/21 consolidated EPS is a fair reflection of the tepid earnings growth expectation (nearly 6 per cent CAGR over FY19-21E), especially considering the expected turbulence due to BS6 transition.

"Based on limited scope for an upside and margin of safety at the current stock price, we maintain Neutral with a target price of nearly Rs 2,988 (nearly 16 times Mar’21 consolidated EPS)," said the brokerage.
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