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Monday, April 11, 2011

[Indian Stock Tips(BSE/NSE) : 47307] BAJAJ AUTO - OVERPRICED


Bajaj Auto Ltd, the 2nd largest manufacturer of two-wheelers in
India, reported less growth compared to its peers, with production
constraints, diminishing brand image and market acceptance, coupled
with detoriating quality & inability to achieve target sale, the stock
looks struggling.
It's not far that within 6 months Bajaj will downgrade to 4th position
from its 2nd position in two wheeler giving its way to Honda & TVS in
Indian market. Exports sale dropped monthly as well as yearly.
Honda who has newly emerged in the market for two wheeler segments, is
presently producing 1.4 lakh units/month it is further increasing its
capacity to produce 2 lakh units/month as it is commencing production
in its second plant in Alwar (Rajasthan). Within 1 year it is further
increasing its capacity to 3 lakh units/month and within 2 years to 4
lakh units/month as it is starting its plant in Hyderabad and Haryana.
Suzuki is also in the process of doubling its capacity.
Hero Honda, the market leader in this sector, is currently producing
50 lakh units per year and targeted to 84 lakh units per year. From
April 2011, the company has appointed a team of 12 export experts to
look after the sales in 11 different countries thus boosting export
sales after the separation with Honda. TVS is increasing its
production capacity too. TVS is also launching a new variant in two
wheeler for rural market which will be a 3 seater along with luggage
Mahindra, an established auto player has newly entered two and three
wheeler market. It is vigorously making a mark in this new segment
with its strong rural hold (it enjoys a good brand image because of
its tractors) and marketing strategies. They are coming up with
capacity of 70000 units per month soon.
Bajaj is not in any process of increasing its capacity. They are
facing constraints to sell off their current capacity to the fullest.
Bajaj is not introducing any of its new variant as well.
In three wheeler, Mahindra & Mahindra, Piaggio, TVS are fast capturing
the market. TVS is doubling its capacity for three wheelers. Italian
based Piaggio is increasing its capacity to 40000 units per month.
This fierce competition in two and three wheeler sector is affecting
Bajaj's survival in industry.


According to market research conducted on consumers, the most
preferred brand of two-wheelers is Honda, followed by Hero Honda, TVS
and then Bajaj.
Bajaj Auto's market share has been decreasing from 35% in 2006 to17.5%
in Nov 2010. The rapid expansion of competitors, unsatisfactory
quality of product and negligible marketing promotion strategy of
Bajaj with decreasing market share signifies its downfall in auto

We interacted with Bajaj Auto dealers and as they said, Bajaj is
increasing inventory with their dealers and distributors. Thus the
sales recorded by Bajaj in last 6 months are not consumer sale but the
inventory sale of dealers and distributors. Hero Honda & Honda has
waiting period ranging from 2- 8 months whereas Bajaj's bikes are
overstocked with the dealers. A dealer's sale ranges from 150- 500
units per month depending on the area, but the inventory stock is
800-2500.They are appointing dealers unnecessary and increasing the
stock capacity. Acceptance of Bajaj in market has gone for a toss.
Dealers have reported dissatisfaction for Bajaj. They say Bajaj have
been compromising on quality to reduce cost in order to face
competition as they can't further increase their price. They have
reduced their marketing promotion to the level that dealers are not
even provided with sufficient marketing accessories like brochures and


Input costs have increased recently following the spurt in steel,
rubber and aluminum prices. Thus, Margins of Auto universe is expected
to contract sequentially to reflect higher input costs. This will
result in very high operating margin pressure.


The leader in this segment Hero Honda is a better performer with
increasing market share in last 1 year. Its share price rose by 15 %
whereas Bajaj 's share price rose by 300% in last one year i.e. Bajaj
Auto is only operator base not fundamental.
2 years back Bajaj was trading at 300/share price. On 8th April, 2011
the stock touched 2820 i.e.1410 due to 1:1 bonus and it is more than
900% increase in price. This is not fundamentally or technically
justified. Fundamentally, Bajaj is losing its ground by decreasing
market share. 4 years back, it enjoyed market share of more than 35 %
and currently its market share is mere 17.5 % (as explained above) and
further on a fall.
Thus studying the fundamental and technical aspect of Bajaj Auto, it
is trading at its highest level and we recommend a STRONG SELL on
Bajaj Auto at CMP 1410 with target it falling down to 1100 and further
to fall 900 within a year after the capacity expansion of its
competitor like Honda & Hero Honda .

DISCLAIMER: - Smart Profit has taken due care and caution in
compilation of data for its reports. The market view and investment
tips expressed on Smart Profit are in no way a guarantee either
express or implied. However, Smart Profit does not guarantee the
accuracy, adequacy or completeness of any information and is not
responsible for any errors or omissions or for the results obtained
from the use of such information.



(Research Analyst)

(Customer Care Executive)

(Customer Care Executive)


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