Industry Analysis Strategic Analysis Financial Analysis Recommendation

INDUSTRY ANALYSIS TWO WHEELERS

Tool Used: Porters Five Forces Model

Competitive Force 1: Rivalry Among Existing Firms

Industry Growth Rate

Competitive Force 1: Rivalry Among Existing Firms

Growth Rate
50 40 30 20 10 0 -10 -20

Growth Rate

200 200 200 200 200 200 200 200 200 201 201 201 1-02 2-03 3-04 4-05 5-06 6-07 7-08 8-09 9-10 0-11 1-12 2-13

Industry Growth Rate GDP Growth Rate

41 5.8

31 3.8

15 8.5

21 7.5

19 9.5

14 9.7

-8 9

4 6.7

24 9

11 7.5

14 7.8

13 7

Competitive Force 1: Rivalry Among Existing Firms

The Two wheeler industry as can be seen in the above graph has shown a strong co relation to the GDP growth and thus based on the above co relation; the industry growth is pegged as following

2011 2012 2013

11% 14% 13%

Competitive Force 1: Rivalry Among Existing Firms

Concentration and Balance of Competitors Two Wheeler Industry Number of companies and relative size Company Name Hero Honda Limited Bajaj Auto TVS Motor Company Company Size (top Line) 117,089 85,215 32,080 %age Size (In terms of Revenue) 100 72.77 27.39

HMSI
Yamaha Suzuki

24.6
4.66 4.08

Competitive Force 1: Rivalry Among Existing Firms

Here, the data suggests that the industry is dominated by three major players namely, Hero Honda, BAL, TVS and HMSI This suggests high degree of concentration and therefore a relatively low chance of price wars or price competition The possibilities are that the companies would try to provide the best cost but not the lowest cost

Competitive Force 1: Rivalry Among Existing Firms

Degree of Differentiation The data for market share in different segments namely Executive, Economy and Premium , as also Scooters shows us the following Hero Honda is the leader in Executive segment Bajaj is the market leader in Economy and Premium segments TVS and HMSI have major share in the scooter market This shows that every major firm in the industry has its own space of competition and thereby specific points of differentiation in terms of segments Also, being technology focused, the players have technology differentiated from each other and thus have a differentiation in product terms EG: DTSI, RTR etc

Competitive Force 1: Rivalry Among Existing Firms

Switching Costs Factors resulting into high switching costs

Highly Differentiated products

High Price of Product

High Depreciation

Intangible costs in terms of efforts like registration of the vehicle, insurance etc

Competitive Force 1: Rivalry Among Existing Firms

Ratio of Fixed to Variable Costs Industry Cost Structure

Competitive Force 1: Rivalry Among Existing Firms

Here we assume that Employee costs and Mfg Expenses are fixed and Selling expenses and Raw Material costs to be variable

The ratio of fixed to variable costs then becomes 1:9

However, due to importance of scale in the size of the business, there is aggressive competition for gaining market share

Competitive Force 1: Rivalry Among Existing Firms

Current Capacity Utilization for industry is 75%
Current Capacity Utilization for industry is 75%
Hero Honda, BAL and TVS have a utilization of 88%, 69% and 67% respectively

Smaller players like HMSI and Yamaha have a utilization of more than 80% High Exit Barriers, however since the demand situation is good, the incentive to cut prices and fill capacity is reduced

Competitive Force 2: Threat of New Entrants

Two possible levels at which new entrants might enter the Two wheeler industry are High End Bikes:

Companies like Ducati, BMW, Triumph etc These bikes would be more than 250 cc Business model is different with parts being imported and assembled in India This segment is not likely to command a great share in the market and hence cannot challenge the leadership of existing companies

Competitive Force 2: Threat of New Entrants

New Companies entering in the competitive segments: These entrants would face the following problems Economies of Scale The existing market leaders have achieved high economies of scale and utilization A new entrant would have to enter with high capacity and less utilization or less capacity to start with Distribution Channel Leverage

Company Hero Honda

Dealers 550

Service Centres 3500

BAL
TVS Honda

485
604 285

1600
2500 709

Competitive Force 2: Threat of New Entrants

Any new entrant therefore would find it extremely difficult to setup a distribution network that the existing players already have
The major reason for this is that BAL, Hero Honda and TVS all have tightly knit distribution network and these dealers would not sell other brand products in their dealerships Also, apart from this, for any new investor to setup a dealership the costs are significant considering the nature of the product and service as also the infrastructure requirements

Competitive Force 3: Threat of Substitutes

The substitution in this case could be an upward substitution The following are the advantages that a two wheeler provides over an upward substitute
Low Maintenance cost Low operational cost

Fast transportation

Low initial investment

In the above context, only one recent product development namely Tata Nano, was close to becoming a substitute, however it provided only a low initial investment option for a Four wheeler but the maintenance and the operational cost is still a deterrence, thus an upward substitute seems unlikely in the near future

Competitive Force 4: Bargaining Power of the Buyers

Price Sensitivity
Price Sensitivity determines the extent to which buyers bargain for a lower price Conventionally, Indian Consumer has always been price sensitive and expects more value for every marginal increase in price However, the following factors determine price sensitivity The extent of Differentiation Product category and investment amount

Limited players and hence a price premium commanded by each player

Competitive Force 4: Bargaining Power of the Buyers

Relative Bargaining Power The relative bargaining power is the degree to which buyers are able to lower the price by bargaining This depends on the following Number of Buyers Number of Suppliers In the two wheeler industry, the number of companies is 9 and major players only being 5 On the other hand, the there were 8 million motor cycles sold last year thus suggesting high number of buyers Hence, the relative bargaining power of buyers is very low

Competitive Force 5: Bargaining Power of the Suppliers

Price Sensitivity
Steel, non ferrous materials and fibre plastics for major raw material costs for two wheelers Steel forms 55% of the cost, aluminium forms 30% of the bike Price Sensitivity here depends on the extent to which the buyers (in this case two wheeler companies bargain for a lower price) This depends on the cost structure of the industry Raw Material costs form 73% of the total costs which is a huge component Due to this, the two wheeler companies are extremely price sensitive

Competitive Force 5: Bargaining Power of the Suppliers

Relative Bargaining Power of Suppliers

The relative bargaining power of steel and aluminium suppliers is high due to the fact that these commodities find extremely varied sources of application and thus high number of buyers
Also, the number of steel manufacturers is less compared to the number and volume of buyers Thus the two wheeler industry resorts to cost cutting measures like value engineering and shifting to excise free zones Also, the cost of the raw materials peaked in 2008-09 however it has seen a decline in this fiscal Thus, the cost of raw material is expected to be 70% next year in the overall cost structure

Competitive Force 5: Bargaining Power of the Suppliers

Extent of Vertical Integration Vertical integration is a very distant possibility in this case due to the kind of raw materials involved Inferences The two wheeler industry is a lucrative industry for investing and the only major threat to the industry comes from the cost of raw materials(Steel, Aluminium) which if increases might severely effect the bottom lines of the players

STRATEGIC ANALYSIS

The Bajaj Structure

Bajaj Auto Ltd

Motorcycles Division

Commercial Vehicles (CV) Division

Knock-down Kits (KDK)

Ultra-Low-Cost Car (ULC)

Sports Segment

Commuter

4-Wheelers

3-Wheelers

Pulsar

Discover

Kawasaki Superbikes

Passenger

Passenger

Avenger

Platina

KTM

Cargo

Cargo

BRAND STRATEGY

International Business

The One-Two Strategy

Domestic New Product Lines (PL) Develop each PL as a brand (Removal of Bajaj branding) Attack Manufacturing the ULC as a Concentration on sales-driving International Concentrate on low-income economies like Africa and Latin America with low-cost carriers/bikes, with norms similar to BS-III China as a hub into Far East Acquisition of stake in KTM Strengthening existing service

competitor to Tata Nano Technological innovations

products such as bikes; stopped production of scooters Defend

network in international markets Tie up with other partners to prevent

BS-III compliance for CV segments

More variants across existing PLs.

cannibalization of sales
India as hub for western exports

Other factors
Chakan Plant Hero Honda splitting?

Site for ULC production

Highly-automated plant Labor unrest a cause for concern

More vulnerable
Technological capabilities might make the difference

Succession Plan Rajiv Bajaj already CEO Preempt threat from Sanjiv/Shishir Long-term focus and leadership

FINANCIAL ANALYSIS

FINANCIAL ANALYSIS
COMPARISON

ANALYSIS

DU PONT ANALYSIS

FINANCIAL ANALYSIS

CASH FLOW ANALYSIS

RATIO ANALYSIS

Cash Flow Analysis

Operating Activity:
The substantial increase in cash flow from operating activity was mainly due to increase in sales by 33.41%. Cash generated from sales increased from 943 Crores to 3455 crores. Financing Activity: The company had paid off the short term borrowing of 250 crores and paid dividend of around 350 crores. Had not raised any fund last year. Raised 72 crores long term fund this year and was given AAA rating by CRISIL. Investing Activity: Company have been constantly making investment in its subsidiary companies around 80 crores. This year company have made investment of around 2111 crores, which majorly consist of central and state government bonds.

Comparision Analysis: Sales

18,000.00 16,000.00 14,000.00 Amount in Rs. crore 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 Bajaj Auto Hero Honda Motors TVS Motor Ltd 2008 2009 2010

Sales

9,856.66
10,331.80 3,219.50

9,310.24
12,356.88 3,670.92

12,420.95
15,860.51 4,363.11

Net Profit Margin

Net Profit
16 14 12 PERCENTAGE 10 8 6 4

2
0 Bajaj Auto Hero Honda Motors TVS Motor Ltd

2008
8.32 9.27 0.96

2009
7.4 10.30 0.82

2010
14.23 13.84 1.96

Interest Expenses
Interest Expenses
300 250 Amount in Rs. cr 200 150

100 50
0 -50 Bajaj Auto Hero Honda Motors TVS Motor Ltd

2008 5.16 -35.81 143.38

2009 21.01 -31.68 200.55

2010 5.98 -20.62 243.82

DEBT- EQUITY RATIO

D/E Ratio
1.4 1.2 1 0.8 0.6 0.4 0.2 0 Bajaj Auto Hero Honda Motors TVS Motor Ltd

RATIO

2008

2009

2010

0.84
0.07 0.81

0.84
0.04 1.11

0.46
0.02 1.16

EPS
EPS
140

120
Amount in Rs. 100 80 60 40 20 0 Bajaj Auto Hero Honda Motors TVS Motor Ltd 2008 52.25 48.47 1.34 2009 45.37 64.18 1.35 2010 117.69 111.76 3.71

Ratio Analysis Profitability Ratio

Profitability Ratio Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10 Operating Profit Margin 16.89 14.11 12.29 12.55 21.05

Net profit margin

13.86

12.66

8.32

7.4

14.23

Interest Coverage Ratio

4280.03

280.28

224.91

53.63

418.34

The Company has high EBIT to cover its interest expenses.

Profitability Ratio Ctd.

Profitability Ratio Mar' 06 ROCE RONW 23.32 23.09 Mar' 07 20.9 22.36 Mar' 08 39.71 47.61 Mar' 09 32.75 38.92 58.63 58.14 Mar' 10

ROTA

11.05

546.96

109.73

116.56

202.4

Increasing returns over the period of time

Efficient utilization of asset.

Per Share Ratio

Per Share Ratios
Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10 EPS 108.87 122.35 52.25 45.37 117.69

Book value per share

471.49

546.96

109.73

129.23

202.4

Dividend per share

40

40

20

22

40

Fall in PAT and increase in equity capital in the year 2008 results in low Per Share Ratio. Recovery trend after 2008 economic debacle At present highest per share ratio as compared to its competitors.

Liquidity & Solvency Ratio

Liquidity & Solvency Ratio
Current Ratio
Quick Ratio Debt Equity Ratio Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10

0.79
0.69 0.31

0.84
0.76 0.29

0.88
0.64 0.84

0.84
0.73 0.84

0.69
0.55 0.46

Shows the companies operating efficiency.

Company finances its current liability with the creditors fund,So the ratio is below 1

Management Efficiency Ratio

Management Efficiency Ratio Fixed asset turnover ratio Inventory turnover ratio debtors turnover ratio number of days in working capital Mar' 06 2.62 34.14 22.00 -37.82 Mar' 07 2.96 36.88 22.66 -25.57 Mar' 08 2.95 29.33 21.93 -9.73 Mar' 09 2.6 28.64 27.45 -8.31 Mar' 10 3.5 28.87 37.41 -41.29

Negative Operating Cycle. Decrease in working capital requirement.

Du- Pont Analysis

Bottom of Form PBIDT/Sales(%) Sales/Net Assets PBDIT/Net Assets PAT/PBIDT(%) Net Assets/Net Worth ROE(%) 8-Mar 13.55 3.33 0.45 57.56 1.83 47.61 9-Mar 12.2 2.78 0.34 59.28 1.74 44.5 10-Mar 21.04 2.84 0.6

the main reason of increase in profit margin is due to increase in sales by 33.49%, thus utilizing capacity near to optimum level. The industry profit margin was around 16.5%

There has not been any addition to fix asset in last year. 1.46 While closing inventories have increased around 10 70.98 times from 107 cr to 1073 cr.
66.77

VALUATION

 From the above analysis, we can see that the growth in sales of BAL in 2010 is 33.4 % compared to 2009 with CAGR of 12% and that in PAT is 11.50% (CAGR growth in PAT is %).
For Next Year, we can expect a growth in PAT of: 10% (Pessimistic) 12% (Most likely) 15% (Optimistic)

Data as on 2nd September, 2010.

EPS (TTM) = Rs. 138.01 P/E Multiple = 20.17 Industry P/E = 18.89 Price of the stock = Rs. 2778 (BSE), Rs. 2776 (NSE); (time: 15:31, IST) 52 week high= Rs. 2887 (highest on 2nd Sep) and low = Rs.1255
(source: www.moneycontrol.com)

 Average EPS = 123.67

Average P/E multiple = 17.15 P/E Multiple has increased as compared to last year. We can expect PE to be: 17.15 20 21 22

Sensitivity Analysis
Our analysis is based on the assumption that EPS has increased in proportion to CAGR of PAT.
Growth (%) 10 11.5 12.75 current EPS level) EPS (Rs.) 107.54 129.04 138.01 161.3 ( 15

Expected Price of the share:

EPS P/E Multiple 17.15 20 21 22 1844.31 2150.80 2258.34 2365.88 2213.04 2580.8 2709.84 2838.88 2366.87 2760.21 2898.21 3036.22 2761.67 3220.6 3381.63 3542.66 107.54 129.04 138.01 161.3

Beta or volatility of the stock is 0.6423 with respect to NSE Nifty and 0.6379 with respect to BSE Sensex.

Recommendation
For the existing shareholder we recommend them to HOLD the shares with target Price of Rs. 2800 to 2850. And for the new investors to BUY the stock for the short term gain as BAL has expected 14-15% growth in PAT during Quarter 2 ending Sep, 2010 with current P/ E level.

Some of the analysts comment/suggestions:

To stay on with the stock, it because over a longer period of time, the market outperforming performance of Bajaj Auto is likely to sustain for at least in the next 6 quarters, says Technical Analyst, Vijay Bhawani.

Emkay Global Financial Services has recommended accumulate rating on Bajaj Auto with a target of Rs 2865 in its July 23, 2010 research report. Upgrade FY11E EPS by 15.7% to Rs 167.5 and FY12E EPS by 13.4% to Rs 190.9. Upgrade target price to Rs 2865 (up by 13.4%) valuing at 15x PER FY12 earnings. Maintain accumulate rating, says Emkay Global Financial Services research report.
source: www.moneycontrol.com