Recommendation from Auto Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

BAJAJ AUTO : RIDING ON WHEELS OF FORTUNE 

HERE IS WHY
☛Good export market
☛Good growth prospects
☛Good product mix.

Bajaj Auto is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India. It is also the world’s largest three-wheeler manufacturer and the largest Indian exporter of motorcycles and three-wheelers with exports to more than 79 nations in Africa, ASEAN region, Latin America and the Middle East. The company has a strong market position with its diverse product mix – motorcycles ranging in three segments, namely, entry (less than 150 cc), sports (150-220 cc) and super-sports (more than 220 cc). In the sports segment, Bajaj Auto is clearly the dominating leader in India.

Through its subsidiary, Bajaj Auto holds approximately 48 per cent stake in KTM AG of Austria (KTM), the fastest growing motorcycle brand in the world. Acquiring stake in KTM AG gives Bajaj Auto an edge in the super-sports segment. This segment is insulated from the factors that affect the entry level segment like rainfall and rural demand. Also, this segment will increase with more people choosing bikes from the super-sports segment. KTM’s past YoY growth in India (2013-2019) of 38 per cent shows this trend.

Bajaj Auto is well-diversified in revenue generation with 60 per cent domestic and 40 per cent exports. In exports, Africa has a share of 40 per cent, South Asia and the Middle East 28 per cent, Latin America 14 per cent and ASEAN 11 per cent. It has strong brand value in Africa and a first-mover advantage there as compared to its Indian peers. Backed by poor road connectivity, absence of reliable public transportation system and growing demand for an affordable and reliable mode of transportation in the region, Africa’s two-wheeler market is anticipated to register robust growth in the coming years.

Additionally, any BS VI inventory that is unsold in India can be offloaded in Bajaj Auto’s export markets. It is surely in a better position to do that than any of its competitors as it is the largest exporter. Social distancing will impact the use of public transport and this trend will be a positive factor for automobile sales with an increasing number of people opting for individual two-wheelers. With a good monsoon expected this year, rural demand would also see some pick-up. For the quarter ended March 2020, the company’s gross sales decreased 8.5 per cent to Rs 6,610.9 crore in Q4FY20 from Rs 7,225 crore in Q4FY19. Total expenditure for Q4FY20 stood at Rs 5,563 crore as against Rs 6,194 crore in Q4FY19, showing a decrease of 10.19 per cent.

PBIDT, excluding other income, showed an increase of 2.13 per cent to Rs 1,252 crore in Q4FY20 from Rs 1,226 crore in the same quarter last year. PBIDT margin, excluding other income, for Q4FY20 stood at 18.38 per cent as against 16.53 per cent in the same quarter last year. PAT for Q4FY20 stood at Rs 1,204 crore as against Rs 1,305 crore in the same quarter last year, showing a decrease of 7.67 per cent. PAT margin for Q4FY20 stood at 17.68 per cent as against 17.59 per cent in the same quarter last year. The stock is trading at a PE multiple of 16.03x and a PB of 4.1x. By virtue of these factors, we recommend our reader-investors to BUY this stock.