Bajaj Auto: An export play

Broad market volatility and a moderation in two-wheeler sales saw the Bajaj Auto stock lose steam in the last few months. The stock dropped about 17 per cent since it touched its one-year high of Rs 1,839 at end February 2012. This fall, however, presents investors with a long-term perspective an opportunity to buy the stock. The company's sizeable export revenues, its superior operating margins and market leadership position in mid-to-premium segment bikes make it one of the better picks among auto stocks. At the current market price of Rs 1527, it trades at a price to earnings ratio of about 13.5 times its estimated earnings for FY2013, at a discount to Hero Moto Corp (14.5 times). Exports help Having moved up a brisk 17 per cent (year-on-year) in the first half of FY12, volume growth in the domestic two-wheeler industry dropped to 11 per cent in the third and fourth quarters. This moderation has continued into the first two months of 2012-13 too. Besides, domestic three-wheeler volumes have taken a knock, with the expected release of permits in Karnataka, Delhi and Maharashtra being delayed. While petrol price hikes could shift a portion of the demand from cars to two-wheelers, slow economic growth and inflationary pressures imply that the moderation in domestic sales may continue for sometime. Despite this challenge on the domestic front, a few factors work in favour of Bajaj Auto. First, its export exposure. The company is the largest exporter of two and three-wheelers in the country, raking in a third of its revenues from exports, which grew 31 per cent in 2011-12.Exports generally bring in higher margins and, at a time when the rupee is depreciating, it will improve realisations further. That the emerging economies of Africa, Latin America and Asia are the company's biggest markets bodes well for Bajaj. They remain, in a way, shielded from the slowdown in developed economies. While motorcycle exports registered strong growth in April and May, three-wheeler exports took a beating, partly because of a rise in import duties on vehicles in Sri Lanka. The company expects exports to Sri Lanka to revive from July onwards. Premium bikes, launches to boost volumes A second factor favouring Bajaj is its focus on higher segment bikes. Unlike its peer Hero, which leads the market in the entry and executive segment bikes (75-125 cc), Bajaj has a stronger portfolio in the 125-250 cc category (Discover 150, Pulsar 135, 150, 180, 220, Avenger 220). It has a 50 per cent market share in this segment. This tilt in product mix towards the higher segment bikes favours the company at such times because these bikes are targeted at people with higher disposable incomes, and those less sensitive to inflation, price increases and interest rates. They bring in higher realisations as well. Even as Bajaj's volume growth in the 75-125cc segments remained, at best, flat in 2011-12, offtake in the higher segment grew by 14.5 per cent, pushing up overall growth. A continuation of growth in this segment coupled with launches such as the Discover 100, Discover 125 ST and Pulsar 200 NS should provide an impetus to volumes in FY13. A third strong point for Bajaj Auto lies in its operating margins. Unlike the rest of the auto industry, which records about 10-12 per cent operating margins, the company has consistently been able to maintain 19-20 per cent margins in the last two years. Bajaj Auto's ability to hold on to profit margins stems from its focus on mid-to-premium motorcycles, and a good hold on the three-wheelers market and exports, where it enjoys higher pricing power. It has been able to pass on a major portion of cost hikes through periodic price increases, the latest being in May 2012. Financials For the year ended March 2012, Bajaj Auto's net sales grew by 19 per cent to Rs 18,880 crore, while adjusted profits grew by 11.5 per cent to Rs 3104 crore. Operating margins came in at 19 per cent, slightly lower than 19.3 per cent last year.