ROYAL BANK OF SCOTLAND- RBS RECOMMENDS A SELL ON BAJAJ AUTO
Sharp market share losses in domestic two-wheelers and the high base effect in three-
wheelers should make profit growth difficult in the coming quarters. We cut our EPS
forecasts 3-5% for FY11-12 and downgrade to Sell, as we expect competition to heat up
in both segments post the Hero-Honda JV split.
Sharp loss of market share in domestic two-wheelers
The Indian consumer’s new-product euphoria for Bajaj seems to be losing steam as its
market share in two-wheelers fell 230bp in 3Q vs a 900bp gain from March-09 to
September- 10. In this period, leader Hero Honda overcame vendor supply constraints,
grabbing market share from the rest of the players. This market share shift is likely to
have a bearing on pricing power, given that we forecast just 10% sector growth in FY12.
In our view, key to Bajaj’s medium-term growth in two-wheelers are a new product
launch due in April and export volumes in FY12 (with the company likely to give
guidance on this in February). We take a cautious stance and downgrade our sales
volume 5% for both FY11F and FY12F. We see large investments by Hero & Honda in
the sector, increasing competition and weakening domestic positioning in the medium
term as a result of the recent Hero-Honda JV separation.
High base effect for the highly profitable three-wheelers a potential challenge in FY12
Scrapping of permits for three-wheelers by the state of Tamil Nadu in 2Q brought
forward buying, leading to sharp 40% volume growth for the industry in the quarter up to
October, but growth since them seems to have lost steam. We trim our EPS by 3-5% for
FY11F-12F as high returns may be unsustainable in the medium term with increased
competition in the segment from Piaggio, Mahindra & Mahindra and TVS Motor.
Rising fuel prices and interest rates favour entry-level bikes; downgrade to Sell
Rising petrol prices favour demand for fuel-efficient entry-level bikes rather than
premium bikes. Although a favourable employment scenario in IT augurs well for
premium bikes, we believe increasing competition from global motorcycle majors will
squeeze profitability. With the high-base effect, we think our earlier forecasts now look
overoptimistic, as EPS growth will likely be a muted 8% for FY12F. We cut our target
PE to 12x to arrive at a Rs1,103.60 target price and downgrade to Sell (from Hold). We
believe the upside risks are strong FY12 export guidance and the new product’s success.
Find the attachment for the detailed report of RBS on SELL BAJAJ AUTO.
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