ROYAL BANK OF SCOTLAND- RBS RECOMMENDS A SELL ON BAJAJ AUTO

[Viren Shah]

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.


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Smart Profit Financial Consultancy
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