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Bajaj Auto Tops M&M in M-cap to Regain 3rd Largest Auto Co Tag

Bajaj Auto Surpasses Mahindra & Mahindra in Market Capitalization

Source and Citation: Original reporting by ET Bureau in Economic Times published on January 10, 2024.

Analysis for Layman

Bajaj Auto has overtaken Mahindra & Mahindra (M&M) to secure the position of the 3rd most valuable automobile company in India by market capitalization. Market capitalization, denoting the total market value of a company’s outstanding shares, now stands at ₹2.05 lakh crore for Bajaj Auto, surpassing M&M’s ₹2.02 lakh crore.

Bajaj Auto trails only Maruti Suzuki and Tata Motors in market valuation within the Indian auto industry. The company’s shares exhibited a 1.55% rise, closing at ₹7,094 per share, sustaining an upward trend throughout the past year. This surge follows Bajaj’s announcement of a ₹4,000 crore share buyback program at a 43% premium to the latest share price, facilitating the acquisition of 40 lakh shares, equivalent to 1.41% of outstanding shares.

Bajaj Auto Tops M&M in M-cap to Regain 3rd Largest Auto Co Tag

Impact on Retail Investors

This development bodes well for Bajaj Auto’s retail investors. The share buyback at a premium signifies management confidence and rewards loyal investors. Notably, the consistent increase in Foreign Portfolio Investment (FPI) stake over nine consecutive quarters to 14.64% underscores strong institutional confidence in future growth. Optimism surrounding Bajaj’s expanding presence in electric vehicles (EVs) is a driving force behind the stock.

Moreover, Bajaj Auto’s debt-free status, consistent high dividend payouts exceeding 70%, robust cash generation, and diversification into the premium segment and EVs position it as an attractive choice for retail investors at current levels. The anticipated Ola Electric IPO could unlock additional value in Bajaj’s EV portfolio. Retail investors are advised to view significant dips as opportunities to invest in this fundamentally robust auto stock for long-term gains.

Impact on Industries

This development solidifies Bajaj Auto’s standing as a leader in the two-wheeler and three-wheeler vehicle segments domestically. It adds pressure on competitors like Hero MotoCorp and TVS Motors to accelerate their EV plans and enhance competitiveness.

The news also underscores the intensifying competition in the electric vehicles space, with players like Ola Electric emerging as key challengers alongside established auto firms venturing into EVs. Ola’s IPO and valuation as a first mover will set the benchmark for the wider industry’s EV potential.

Furthermore, this signals a positive outlook for automobile exports from India, with Bajaj Auto gaining share abroad, supported by a distribution tie-up with Triumph. Auto component suppliers may benefit from Bajaj Auto’s sustained growth, while those focused solely on Internal Combustion Engine (ICE) components may require realignment.

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Long Term Benefits & Negatives

The long-term implications for Bajaj Auto are overwhelmingly positive. Through timely investments and strategic moves such as EV diversification and a focus on premium bikes, Bajaj is well-positioned to capitalize on India’s two-wheeler market growth in the coming years.

Generating substantial cash flows, maintaining a debt-free status, and a consistent dividend history have cultivated a stable, low-risk reputation for Bajaj Auto among investors. This stability provides insulation during downturns and grants flexibility for capital allocation by the management in the future.

However, risks such as new regulations affecting vehicle segment growth, chip shortages impacting output, and potential increased competitive intensity in the premium bike space pose long-term challenges. Maintaining technological edge and quality standards across a widening product portfolio spanning budget to premium two-wheelers will also be a prolonged challenge.

Short Term Benefits & Negatives

The share buyback announcement, resulting in a 1.5% surge in stock in a single day, underscores short-term positive investor sentiment towards Bajaj Auto. The steady increase in Foreign Portfolio Investment (FPI) ownership in recent quarters indicates funds’ eagerness to raise exposure based on positive news flow.

For retail investors, the buyback offer at an attractive valuation provides a near-term return boost. However, caution is advised due to market sensitivity. Any negative macro news or underwhelming monthly auto sales data could result in sharp stock corrections. Short-term traders should account for these risks and avoid overexposure.

For the company, the buyback program will enhance Earnings Per Share (EPS) and strengthen return ratios. Nevertheless, it will also deplete cash reserves by ₹4,000 crores in the short term, reducing flexibility for endeavors such as production expansion, discounts, or marketing spends to protect market share. Consequently, some short-term trade-offs may be necessary.

Company Impact Analysis: Bajaj Auto Regains Top 3 Auto Company Spot

Indian Companies:

Potential Gainers (5):

  • Bajaj Auto Suppliers: Companies like Endurance Technologies, Minda Industries, and Bharat Forge could benefit from increased production volumes and potential market share gains for Bajaj Auto, leading to higher demand for their components.
  • EV Infrastructure and Technology Companies: Increased focus on EVs with Bajaj Auto’s strong position in the segment could benefit companies like Tata Power (charging infrastructure) and Ather Energy (EV technologies) through potential partnerships or increased demand for their solutions.
  • Diversified Auto Companies: Companies like Hero MotoCorp and TVS Motor Company could see improved investor sentiment in the auto sector due to Bajaj Auto’s positive performance, potentially boosting their own valuations.

Potential Losers (5):

  • Mahindra & Mahindra (M&M): Losing the third spot and facing potential market share competition from Bajaj Auto in the EV and premium motorcycle segments could impact M&M’s investor sentiment and stock price.
  • Traditional Two-Wheeler Companies: Companies like Bajaj Auto may prioritize resources and marketing towards their EV segment, potentially impacting sales and market share for traditional two-wheeler players like Hero MotoCorp and TVS Motor Company.
  • Auto Parts Companies with Limited Exposure to Bajaj Auto: Companies whose main business is not tied to Bajaj Auto might see reduced investor interest in the broader auto sector due to concerns about overall market share dynamics.

Global Companies:

Potential Gainers (5):

  • Global EV Technology Providers: Companies like Tesla and Volkswagen partnering with Bajaj Auto for technology or market access in India could benefit from potential increased demand and brand recognition.
  • Motorcycle Manufacturers with EV Focus: Companies like Triumph Motorcycles (Bajaj Auto partner) could see improved investor sentiment with Bajaj Auto’s success in the EV segment, potentially boosting their own shares.
  • Global Investment Firms with Focus on Indian Automobile Sector: Increased optimism about the Indian auto market due to Bajaj Auto’s performance could attract more foreign investment towards the sector, benefiting companies reliant on global funding.

Potential Losers (5):

  • Global Motorcycle Manufacturers without EV Strategy: Companies like Harley-Davidson facing competition from Bajaj Auto’s potential entry into the premium motorcycle segment in international markets could lose market share and see downward pressure on their valuations.
  • Global Auto Parts Companies not Supplying Bajaj Auto: Similar to Indian suppliers, global companies not involved in Bajaj Auto’s supply chain might experience reduced investor interest in the broader auto parts sector due to changing market dynamics.
  • Investment Funds Shorting Indian Auto Companies: With positive sentiment towards Bajaj Auto, short positions on other Indian auto companies could face losses if the overall sector performs better than expected.

Market Sentiment:

The news is likely to have a positive impact on the Indian auto sector, particularly for companies associated with Bajaj Auto like suppliers and EV partners. M&M might face some short-term pressure, but the overall outlook for the Indian auto market could improve due to increased optimism and investor confidence. Globally, companies related to Bajaj Auto’s partnerships and EV focus could benefit, while traditional motorcycle manufacturers and auto parts suppliers without exposure might see mixed reactions.

Note: This analysis is based on the limited information provided in the news article. Further research and analysis would be required for a more comprehensive understanding of the potential impacts.

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