ProfitNama

ProfitNama

This Auto Stock is Back on the Growth Track – Should You Buy Bajaj Auto for Long Term?

Bajaj Auto subsidiary gets RBI nod for NBFC business

Disclaimer:

The analysis and opinions provided are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. 

Why we consider buying Bajaj Auto at current levels:

Financial Performance:

  • Sales have grown at a steady pace over the long term with 5 year CAGR of 7.66% and 10 year CAGR of 6%. This indicates strong execution by management to grow volumes consistently over different business cycles
  • Operating margins have remained very healthy in the 16-19% range over the past 10 years showcasing pricing power and ability to pass on raw material cost increases through price hikes
  • Return on Capital Employed has averaged 26% over last 5 years and 23% over last 10 years. This highlights very efficient use of capital for generating returns well above the cost of capital
  • Zero debt on the balance sheet highlights strong financial discipline. Company is generating abundant cash flows to fund growth rather than relying on debt
  • Dividend payout ratio of 66% ensures regular income for investors while also retaining funds for growth

Competitive Position:

  • In motorcycles, Bajaj Auto is the 3rd largest player with 18% market share. It has leading position in executive and premium segments through brands like Pulsar and Dominar
  • In 3-wheelers it has dominant share of 60% specially in passenger carrier segment. This provides cash flow stability
  • Strong distribution reach across India and export presence across 70+ countries provides resilience to demand shocks in any one geography

Growth Drivers:

  • Increasing rural incomes and financing penetration will drive two-wheeler demand over long term
  • New product launches planned under KTM and Husqvarna premium brands
  • Entry into electric vehicles through Chetak scooter will aid growth in future

Valuations:

  • Stock is trading at P/E of 25.1x which is at 10% premium to its 5 year average multiple of 22.8x
  • PEG ratio of 1.1x indicates earnings growth is adequately factored in price
  • 23% EPS CAGR over last 10 years makes current valuations appear reasonable

Bajaj Auto has a healthy long term growth trajectory alongside efficient operations, robust financials and leading industry positions. This makes it a good buy from 2-3 year investment perspective.

Key ratios for Bajaj Auto stock in simple terms for a layman investor:

  1. Debt Equity Ratio
  • This ratio shows how much debt the company has compared to the capital brought in by shareholders
  • Bajaj Auto has a debt to equity ratio of 0.00 which means it has no debt at all on its books
  • This shows the company generates enough profits on its own to run the business without taking any loans or borrowing money from outside
  • A debt to equity ratio of below 1 is considered safe by most investors
  1. Profit Margin
  • Profit margin shows how much profits the company makes on every 100 rupees of sales
  • Bajaj Auto has an operating profit margin or OPM of 19%
  • This number has remained steady between 16-19% over the last 10 years even during tough economic conditions
  • The high and consistent margins indicate that the company has pricing power in its products and manages costs well
  1. Return on Equity
  • Return on Equity or RoE measures how much returns the company generates on the money invested by shareholders
  • Bajaj Auto’s RoE is 20.2% which means for every 100 rupees invested by the shareholders, the company is making a return of Rs 20.2
  • The industry average RoE is around 16-18%, so Bajaj Auto is ahead showing management efficiently allocates capital

All the vital ratios show that Bajaj Auto operates its finances very prudently and has a efficient and shareholder friendly management team. This makes it a good stock to own with low levels of risk.

Bajaj Auto operates in a competitive two wheeler industry with major players like Hero MotoCorp, Honda, TVS Motors, Royal Enfield etc.

Market Share:

In the domestic motorcycle market, Bajaj Auto stands at the 3rd position with a market share of 18%. The company has maintained a share between 14-19% over the past 5 years. Top player Hero MotoCorp leads with close to 40% share.

Bajaj Auto however leads the export markets with over 50% share of motorcycle exports from India. So while it lags in local share, it has done well to expand globally.

Financial Performance:

Bajaj Auto has delivered a sales CAGR of 7.7% over the past 5 years which is slightly better than players like TVS Motors at 7.5% and Hero MotoCorp at 6.9%. Only Royal Enfield has done better with 20% CAGR.

In terms of profitability, Bajaj maintains a 19% operating margin which is matched only by Eicher Motors. Other players operate at 12-16%. This indicates Bajaj’s superior quality, cost efficiency and pricing power.

The company also maintains one of the highest return on equity at 20%. This means for every 100 rupees invested by shareholders, the company returns Rs 20 in profits every year. Only Eicher Motors does better on this parameter.

So while Bajaj does not lead in market share, it matches or outperforms competition on metrics like growth, margins and capital efficiency.

Financial Strength:

Bajaj Auto’s biggest advantage compared to all other players is its zero debt position and strong cash surplus of over Rs 19,000 crores. The company funds expansion only through internal profits.

In contrast players like Hero and TVS have higher debt burdens and lower cash on books as they rely more on external borrowing to grow faster.

While market share is moderate, Bajaj Auto outperforms or matches competitors on most financial and operating metrics making it a strong franchise. The fortress like balance sheet also makes it very resilient to downturns.

At the current price of Rs 6,070, Bajaj Auto stock appears reasonably or slightly undervalued based on its financial performance:

Valuation Multiples:

The stock is trading at a P/E multiple of 25x which is largely in line with its 5 year historical P/E range of 20-25x. So it is neither overvalued nor attractively priced based on this measure.

However, the P/E seems justified when we see the company has delivered a 5 year EPS growth of 22%. Typically high growth companies trade at higher multiples.

The stock’s P/B ratio is 5.9x while high performing auto stocks trade above 8-10x book. This indicates some scope for re-rating on price to book basis.

Future Growth Prospects:

While Bajaj’s domestic motorcycle sales dropped during 2019-2022, a sharp rebound is expected over the next 2 years driven by:

  1. Rural demand recovery and increased financing penetration
  2. New product launches under Husqvarna & KTM brands
  3. Gaining market share in executive and premium bike segments

Bajaj is also making an entry into electric vehicles which opens a big growth avenue. Considering these factors, 20% earnings CAGR is likely over next 3 years.

Thus for a high quality franchise like Bajaj Auto with leadership across segments, zero debt, robust past profitability and healthy growth visibility over next 2-3 years; current valuations look reasonable.

The stock could see re-rating towards 30 P/E if growth recovery plays out well. So current levels offer an attractive long term entry point especially on price corrections.

The two wheeler industry in India that Bajaj Auto operates in has good long term growth prospects, albeit with some short term challenges:

  1. In the domestic market, two wheeler sales fell by 8.1% CAGR over the past 4 years due to COVID disruptions, rising raw material costs, rural slowdown etc. However volume is expected to bounce back over next 2-3 years.
  2. Various studies project the domestic two wheeler market to grow at 7-9% CAGR over next 5 years. This will be driven by:
  • Rising urbanization and growing youth population needing mobility
  • Government’s push for manufacturing industry under Make in India initiative
  • Increasing rural incomes and easy financing availability
  1. Within urban centers, preferences are shifting towards premium motorcycles and gearless scooters which are higher priced models. This trend benefits players like Bajaj Auto.
  2. Exports also present a big opportunity for the industry as global demand recovers and brands like Bajaj Auto and Royal Enfield gain more acceptance internationally.
  3. Electric vehicles are the future with nearly 30 new product launches lined up over next 3-4 years. Bajaj has taken the first mover advantage here.

So while short term growth faces headwinds, the long term view is positive. As the market leader, Bajaj Auto is well placed to tap the industry tailwinds. Their strong brand, in-house R&D and extensive distribution reach give them a competitive edge.

Dominant Position Bajaj Auto is the 3rd largest two wheeler company in India with an 18% market share in motorcycles and over 60% market share in 3 wheelers. The strong position is built on popular brands like Pulsar, Platina and CT which are among the top selling models. This scale gives Bajaj pricing power and strong brand equity.

Diversified Across Products and Geographies Around 50% of Bajaj’s domestic motorcycle sales come from executive (Pulsar) and premium (Dominar, KTM) segments which have better margins. Their 3 wheelers business also gives cash flow stability. On exports front, Bajaj sells to over 70 countries giving protection against geography specific slowdowns. This diversification will aid stability.

Proven Innovation Capabilities Bajaj has regularly introduced new models, variants and upgrades to excite customers and respond to evolving preferences. Some examples are launch of Platina in entry segment, Pulsar RS 200 in sports segment, Chetak electric scooter etc. Besides performance bikes from KTM also sport Bajaj’s technology. This shows management foresight and R&D competence.

Fortress Like Balance Sheet Bajaj has zero debt on its balance sheet and carries a huge cash surplus of over Rs 19,000 crores funded entirely from internal profits. Unlike peers like Hero Moto, Bajaj funds expansions through own resources giving immense financial strength to weather industry slowdowns. This also gives them flexibility to tap opportunities.

Growth Visibility Domestic two wheeler industry is projected to grow at 8-9% over next decade driven by rising income levels and favorable demographics. Bajaj being the market leader is well placed to tap demand revival specially in executive and premium 2W segments where they are strong. Their early mover advantage in electric space also positions them well for the future.

Financial Performance Despite erratic demand conditions seen in last 3 years, Bajaj has delivered 5 year sales and profit CAGR of 7.7% and 22% respectively highlighting execution efficiency. Operating margins have averaged 19% with return on capital employed coming in at a healthy 26%. The stellar financial metrics showcase management calibre.

Thus given its competitive strengths, growth prospects and financial track record, Bajaj Auto seems well positioned to outperform over long term. The company targets to enhance market share across domestic and international markets which gives revenue and profit visibility for long term investors.

Here is a view on why Bajaj Auto’s prospects look positive in the near term:

  1. Bajaj has underperformed the Nifty Auto index over the last 1 year with returns of 66% as against the sectoral index returns of 86%. So some catch up is likely from a relative valuation perspective.
  2. In the latest Sep 2022 quarter results, Bajaj Auto posted record profit of Rs 2,040 crore driven by solid operating margins of 20% and healthy 16% revenue growth on a yearly basis. This performance momentum is expected to sustain in the coming quarters.
  3. Domestically, two wheeler demand seems to be recovering gradually as economic activity picks up post Covid. Also supply constraints for semiconductors may ease out helping Bajaj ramp up production. Festive season should also aid sales.
  4. On exports front, Bajaj has outstanding order book in key markets like Africa and Latin America. Currency availability issues in Africa are likely to normalize soon aiding dispatch. Recent price hikes will also boost realizations.
  5. Input cost pressures seem to be cooling off with key raw materials like steel, aluminum witnessing declining prices. This will support profit margins.
  6. Considering revenue growth likely in the 12-15% range, operating margins above 18% and favorable business environment, Bajaj Auto seems well placed to deliver healthy bottomline growth of 15-20% for next 2-3 quarters.
  7. Technically, the stock has generated a breakout above Rs 5,900 levels which suggests resumption of uptrend. The bullish crossover in 20 day and 50 day moving averages also bodes well for near term uptick.

So considering the fundamental and technical factors, Bajaj Auto looks set for a positive performance in coming quarters. Expectations of strong Q3 results and sustained domestic & export demand outlook make analysts positive on the stock for short term.

error: Content is protected !!
Scroll to Top

Subscribe to Profitnama to access all articles, explanations, stock analysis
Already a member? Sign In Here