BajajAutoLimited

Fewdaysback,Iwaswatchingthefamous1989HamaraBajajadvertisementonYouTube.
Theinputfromafortysecondadvertisementwasmorethanenoughformybraintobringback
allthepleasantmemoriesfrommychildhooddays.Atasubconsciouslevelmybrainhas
createdanassociationwiththeadvertisementandallthepleasantchildhoodmemories.This
experiencemademerealizethatthehumanbrainisthemostcomplexstructureintheuniverse.

Business

BajajAutostartedoffintheyear1944bysellingimportedtwoandthreewheelersinIndia.In
1959itobtainedalicensefromtheGovernmentofIndiatomanufacturetwoandthreewheelers.
In1970,afterspendingmorethanadecadesincegettingthelicense,BajajAutorolledoutits
100,000thvehicle.Doyouknowhowmanyvehiclesitsoldinthelastfiscalyear?InFY2015,it
sold3,811,201vehiclesinIndiaand62othercountries.

Thecompanydesigns,manufactures,andsellsthreekindsofvehicles
(1)
Twowheelers
Motorcycleatwowheeledvehiclethatispoweredbyamotorandhasnopedals.
(2)
Three
wheelersREathreewheeledvehicleusedforcommercialpurposesanditisthemostwidely
usedlastmilepublictransportationsolutioninIndia.
(3)
FourwheelersRE60anintracity
multipurposevehiclewhichcouldbeusedasataxioraselfdriverentalanditispositioned

betweentheautorickshawandthefourwheelertaxi.RE60isfuelefficientandenvironmentally
friendly.

Thecompanyclassifiesthemotorcycleindustryintothreedifferentsegments
Mileage,
Sports,andPremium
.Withineachsegmenttherearefewsubsegments.Thecompany
manufacturesmotorcyclesinallthreesegments.Whydoyouneedthreekindsofmotorcycles?
Thesimpleanswertothisquestionisthateveryoneisdifferent.InthetablegivenbelowIhave
summarizedallthemotorcyclesitmanufacturesacrossdifferentsegments.

Segment

Motorcycle

Notes

Mileage

Boxer,CT100,Platina,and
Discover

PricerangefromRs0.4to0.6lacs.The
enginecapacityrangesfrom100to150cc.
Itcantravelupto89.5kilometersperlitre.

Sports

Pulsar,Avenger,andKTM

PricerangefromRs0.6to2.5lacs.The
enginecapacityrangesfrom150to500cc.
Itcantravelupto65kilometersperlitre.

Premium

KawasakiNinja

PricerangefromRs2.5lacsandabove.The
enginecapacityrangesfrom250to500cc.
Itcantravelupto30kilometersperlitre.

Longback,IusedtoownamotorcycleinIndia.Iviewedthemotorcyclepurelyasautilityandits
onlypurposeistotakemefrompointAtoB.ThereareacoupleofthingsthatIexpectedfrom
themotorcycle
(1)
HighMileagethenumberofkilometersitcantravelforalitreofpetrol
(2)
LowPricethemotorcycleshouldnotonlytouchmymindbutalsomypurse.Customerslikeme
buymotorcyclesfromtheMileagesegment.

Somecustomersdontviewthemotorcyclepurelyasamodeoftransportation.Theyviewitasa
luxurygoodwheretheyareusedmostlyforrecreation,asalifestyleaccessoryorasymbolof
personalidentity.Thesecustomersdontcaremuchaboutthemileageorpriceofthebike.And
theypayupforqualitybybuyingmotorcyclesfromSportsandPremiumsegment.Thesebikes
acceleratefasterthantheonesinthemileagesegmentbecauseofthehigherenergyorthrust
providedbytheengines.Thethrustproducedbytheengineismeasuredincubiccentimeters
(CC).HigherCCenginesprovidemorethrustandthisresultsinfasteraccelerationandlesser
mileage.

InIndiatheminimumagetoapplyforapermanentlicensetodriveamotorcycleover50ccis18
years.BajajAutosmotorcyclecustomersincludeanyonewhois18yearsorolder.Mostofits
customersaremalesasfemalespreferdrivingscootersinsteadofmotorcycles.AndBajajAuto
exitedthescootersegmentcompletelyin2009asitdecidedtofocusonlyonmotorcycles.The
companyhasaPanIndiadealernetworkandauthorizedservicecenters.Thisreducesthe
searchcostsandenablescustomerstobuyandmaintaintheirmotorcyclesinquicktime.

InFY2015,around54percentofitsmotorcyclesweresoldinIndia.Andtheremaining46
percentwassoldintheInternationalmarkets.Africarepresents45percentofitsinternational
market.Takealookatthetablegivenbelowwhichshowsthemotorcyclemarketshareofthe
companyindomesticandexportmarkets.Whatdoyousee?

Thecompanyhasahealthymarketshareof67.6percentintheexportmarketsanditsshare
wentupovertheyears.ButinIndiaitislosingmarketshareandinthelastfiveyears,itlost
over10percentshare.Losingmarketshareisnotajokeandgainingitbackisdamnhard.Why
isBajajAutolosingmarketshareinIndia?Holdontothisquestionandwewillcomebacktoit
laterinthedocument.

BajajAutothreewheelers,marketedunderthebrandnameRE,areusedforcarrying
passengersanditisthemostwidelyusedlastmilepublictransportationsolutioninIndia.The
companyclassifiesitsthreewheelersintotwodifferentsegments
BigandSmall
.Around60
percentofREitmanufacturesaresmallandthecompanymaintainsaleadingmarketshareof
80percent.Theremaining40percentofREitmanufacturesarebigandthecompanymaintains
only18percentmarketshare.

InordertodriveathreewheelerinIndiaoneneedstoapplyforapermitfromthestate
government.SoREsalesareafunctionofnewpermitsissued.Thisiswhatthecompanywrote
intheirlatestannualreportaboutthepermitsMaharashtrahasissuedfreshthreewheeler
permitsforaround80,000units.TheCompanyexpectsotherlargestatessuchasDelhiand
AndhraPradeshtofollowsuit..

Takealookatthetablegivenbelowwhichshowsthethreewheelermarketshareofthe
companyindomesticandexportmarkets.Whatdoyousee?Overtheyearsthecompany
gainedmarketshareinIndiabyincreasingitfrom39to44percent.Intheexportmarkets,
maintainingamarketshareofcloseto70percentisdecent.

Finally,thecompanyisreadytolaunchitsfourwheeler,marketedunderthebrandnameRE60,
anintracitymultipurposevehiclewhichcouldbeusedasataxioraselfdriverental.Butthe
companycouldntlaunchitastherearemultiplepetitionsfiledagainstthisnewvehiclecategory
intheIndianSupremeCourt.WhilethereisstilluncertaintyaboutthelaunchofRE60inIndia,
thecompanyhasannounceditsplanstoexportit.

AsregardsourquadricycleRE60,theproductisreadyforlaunch.However,RE60
launchwasmiredinlegaltanglescreatedbyvestedinterestsfilingmultiplepetitionsin
variousHighCourts,questioningtheGovernmentprocessincreationofthisnew
category.SomeoftheHighcourtshad,pendingdetailedhearings,orderedstayofthe
Governmentnotificationintheinterimwhilesomeothersadmittedthepetitions,butdid
notfindmerittograntastay.Inthefaceofstayorders,ARAIthetestingagency,kept
theapprovalandrelatedprocessesinsuspendedabeyance.
AnnualReport

Inthetableshownaboveyoucanseethebreakupofproductioncapacityforeachofits
plantproducttype.BajajAutomanufacturesitstwo,three,andfourwheelersinthreeplants
locatedinIndia.TwoofthemarelocatedatWalujandChakaninthestateofMaharashtraand

oneplantatPantnagarinthestateofUttranchal.Threefactoriesputtogetherhasaproduction
capacityof6,060,000vehicles.ComparedtoFY2015salesthecompanyhasanexcess
productioncapacityof37percent.

Thecompanygenerates56percentofitsrevenuefromIndia.Andtheremaining44percentis
madeintheinternationalmarkets.Thetablegivenbelowshowsthesalesbreakupbetween
domesticandexportmarkets.Inthelastfouryearssalesfromtheinternationalmarketsgrewat
therateof21percentcomparedtothedomesticmarketwhichdidntgrowatall.

Oneofthemajorreasonsforthenogrowthsituationinthedomesticmarketsisbecauseofits
Discoverbikewhichislosingmarketshareinthemileagemidlevelsegment.Thecompany
explainedthiswellinthelatestannualreport.

However,therehasbeenanoverallfallinthevolumeofmotorcycles.Thishasbeen
mainlyonaccountofDiscover,whichoccupiesthemiddlesegment,betweenentrylevel
motorcyclesontheonehandandthepremiumsegmentsportorsupersportbikesonthe
other.
Giventheweightofthissegmentintheoveralldomesticmarket,thefallin
salesofDiscoverhasdraggeddowntheotherwiseexcellentperformanceofyour
Companyinthetwowheelerfront.
Consequently,BajajAutosmotorcycleshavelost
domesticmarketsharefrom24.4%twoyearsagoto20%lastyear,andthento
16.5%inFY2015.
AnnualReport

Thecompanydoesntgivethesalesbreakupbetweenitstwoandthreewheelers.Assumingthe
averagecostofanRE(threewheeler)tobeRs1.5lacsthesalessplitbetweentwoandthree
wheelerscomesto65and35percent.ItsRE60(fourwheeler)didntgenerateanyrevenuein
FY2015.Themanufacturingprocessoftwo,three,andfourwheelersbasicallyinvolvesmetal
cuttingandmetalforming(reshapingmetalswithoutaddingorremovingmaterial).Thebasic
rawmaterialsusedinvehiclemanufacturingaresteelandaluminum.

Takealookatthetablebelow.Inthelastfiveyearsthecompanyonaveragespent74percent
ofitssalesonthecostofgoodssold.Thecompanyhas9,183employeesinitspayroll.On
averagethecompanyspent3.25percentofitssalesontheemployee'spayroll.Theremaining5
percentisspentonSG&A,depreciation,andMiscellaneousexpenses.Inthelastfiveyearsthe

averageoperatingprofitgeneratedbyBajajAutocomestoaround18percent.Ispretax
operatingmarginof18percent,loworhigh?

InordertoanswermyearlierquestionweneedtocompareBajajAutosoperatingmarginwith
othercompaniesinthevehiclemanufacturingindustry.Fromthechartshownbelow,wecan
seethatBajajAutosoperatingmarginis7.3percenthigherthanHeroMotorswhichhasthe
secondhighestoperatingmargin.Fromthiswecanconcludethatithasaveryhighoperating
margin.

Wecanttakethesenumbersatfacevalueasthevehiclecategorymixforeverycompanyis
verydifferent.Alsooperatingmarginonlytellyouhalfthestoryandtheotherhalfisrevealedby
lookingattheassetturnover.ButtheabovechartbegsustoaskaquestionWhyisBajaj
Autoabletogeneratesuchhighoperatingmargins?Ifhavetoanswerthisquestioninasingle
wordthenitwillbe
Brands
.RahulBajaj,whoistheChairmanofthecompanyexplainedthis
beautifullyinthe2010AnnualReport.

BajajAutossuperiorperformancesuggeststhatithasbeenmorethanjustleveraging
marketgrowth.Whatwasit?
Forthelastfewyears,yourCompanyhasbeen
workingatdevelopingabrandcentredstrategyespeciallyofitstwokeybrands,
theDiscoverandthePulsar.
Ibelievethat200910sawanearperfectalignment
betweenthepowerofthebrandsthefrontendandproductionefficiency,quality,
costsandlogistics,orthebackend.Iagreewiththemanagingdirectorandhisteamthat
itisthisalignmentwhichhasresultedinyourCompanygrowingfasterthanthemarket
andearningthehighestprofitrateintheindustry.WhatpleasesmeisthatBajajAutois
leveragingitskeybrandstomaximiseprofits.YourCompanysperformancehasnot
beenaboutbuyingmarketsharethroughvariouspricingdeals.Instead,itisabout
gainingsharethroughbetterqualityandbrandingthushavingthecustomerwillingto
payhigherpricesforbettervalue.Yourmanagingdirectoroftensaysthatwhileproducts
maygeneratemarketshare,brandsprovidepricingpowerandcreatehigherprofits.Iam
increasinglytendingtoagreewithhim.A
nnualReport

Itstimetotakealookatreturnoninvestedcapital(ROIC)forBajajAuto.Thecompanyhasan
assetlightbusinessmodelwhichenablesittoturnoveritsfixedandworkingcapitalatveryhigh
rates.AndthisresultedingeneratingROICgreaterthan200percent.Ithasanegativeworking
capitalbecauseofitshighbargainingpowerwithvendorsanddistributors.Inthelastfiveyears,
ithadanaveragecashconversioncycleofnegative23days.

Ithasnegligibledebtinthebalancesheet.Thedebttoequityratiois0.01.Onaverage,93
percentofitsoperatingprofitsgetconvertedintooperatingcashflows.Thisconveystomea
coupleofthings
(1)
majorityofitssalesarequicklyconvertedtocash.Ithasonly10daysof
salesoutstanding
(2)
accountingprofitsarenotoverstatedastheyagreewiththeoperating
cashflows.

LetslookatthechallengesthatthecompanyiscurrentlyfacinginIndia.Takealookatthe
motorcyclesyearoveryeargrowthratefortheentiremotorcycleindustryandBajajAuto.What
doyousee?Themotorcycleindustryasawholeisgrowingveryslowlyinthelast3years.Why
didthishappen?OnereasonisthatIndianeconomydidntdothatwellduringthisperiod.But
thatdoesntexplainthenegativegrowthexperiencedbyBajajAuto.Clearlytheproblemis
companyspecific.

Takealookatthetablegivenbelowshowingthescootermarketshareintwowheelersoverthe
lastfiveyears.Whatdoyousee?Inthelastfiveyearsthescootersmarketsharewentupfrom
17to28percent.Rememberthatthecompanyexitedthescootersegmentcompletelyin2009.
Thecompanydidntgetbenefitedfromtheincreaseindemandforscooters.Click
here
toread
moreaboutthis.

StayingoutofthescootersegmentwasastrategicmovefromRajivBajaj,whoistheManaging
Directorofthecompany.InoneinterviewhesaidWearenotmakingscooters.Forthat,we
needtoearntherighttomakethemandforthatIneedtobeNo.1inmotorcycles.Click
here
to
readmoreaboutthis.Theincreaseindemandforscootersdoesntexplainwhythecompany
lostmarketshareinmotorcycles.

Inordertofindouttherootcauseoftheproblemweneedtoknowthatthemotorcycleindustry
isdividedintosegmentsandsubsegments.TheMileagesegmentisdividedintoM1,M2,and
M3subsegments.Togethertheycontrol82percentoftheindustrymotorcyclevolumes.The
SportssegmentisdividedintoS1,S2,andS3subsegments.Togethertheycontrolcloseto18
percentoftheindustrymotorcyclevolumes.ThePremiumsegmentisnotbrokendownintoany
subsegmentanditcontrolsaround0.08percentofthemotorcyclevolumes.Spendsometimeto
understandthetablegivenbelowwhichshowstheindustryvolumesacrosssubsegments.

BajajAutoisthemarketleaderinS3(KTM)andS1(Pulsar)subsegments.Profitmarginsare
muchhigherinS1andS3subsegments.ButS3istoosmallcomparedtotheoverallindustry
volumesanditisnotmovingtheneedlemuchforBajajAuto.S1(Pulsar)hasbeendoing
wondersforBajajAutowelloveradecade.

ThetroublemakerforBajajAutoisM2andM3(Discover)subsegmentswhichcommands61
percentofindustrymotorcyclevolumes.Inoneyear[2014to2015]itsmarketsharefromM2
andM3camedownfrom14to10percent.Thenextquestionthatoneshouldaskisthatwhy
BajajAutoisaleaderinPulsarandnotinDiscover.Isthisrandomoristhereareasonbehind
theleadership?HoldontothisquestionandIwilladdressitinthenextsection.

Takealookatthechartshownabove.Whatdoyousee?Thedomestictwowheelermarketis
extremelycompetitive.ThesecondbiggestplayerHondaisfightingtogainmarketshareinthe
M1segmentfromHeroMotors.Hondaissuccessfulinachievingthisbyincreasingitsoverall
marketsharefrom13to27percent.Butitgainedthismarketsharebysacrificingprofitmargins.
Thisisnotgoodforalltheplayers,includingHondaMotors,intheindustry.Click
here
toread
moreaboutthis.BajajAutoisplayingthegamesensiblybymovingawayfromentrylevel[100
to110CC]to[150CC]motorcyclesegment.

Moat

SirArthurConanDoylewastheauthorandcreatorofSherlockHolmesthemostrationaland
intelligentdetectiveofalltime.InoneofthebookshewroteOnceyoueliminatethe
impossible,whateverremains,nomatterhowimprobable,mustbethetruth.Iamgoingtouse
thesametechniquetoidentifyifBajajAutohasanymoat.Iwilltrytoprovethatthecompany
doesnthaveamoat.IftheabsenceofamoatisimpossibletoprovethenIwillconcludethatthe
companyhasamoat.

Letusstartwith
supplysideadvantage
,oneofthethreesourcesofmoats.Isthereany
proprietarytechnologyinvolvedinthemanufacturingoftwo,three,andfourwheelersthatis
protectedbypatentsorknowhow?Thereisnone.Inthevideogivenbelowwatchfrom36:25to
37:30minutestoseeRajivBajajexplainaboutthetechnologysaturationthathappenedinthe
motorcycleindustrylongback.

Motorcyclebusinesswhichwemusthumblyacceptthatthetechnologyhassaturated
longtimeback.Ifyoureadtheautomagazines,wewouldlookveryfoolishbecauseif
youmakecommuterbikeswearecompetingonthelast1.3kilometersmileage.Andif
youmakesportsbikethenyouneedfourstopwatchestofindoutwhoisonethirdofa
secondfasterthanwhom.
Inotherwordseverybodysproductislikeeverybody
elses.Anditcanpointtoaverycommoditizedindustry.
RajivBajaj

Letusmoveontothe
localeconomiesofscale
,thenextsourceofamoat.Ifacompanycan
produce3,811,201vehiclesinthreefactories,thenitwillgetbenefitedfromeconomiesof
scale.Butthatdoesntmeanthatitbecomesamoatforthecompany.Whyisthat?Thisis
becausethetotalmarketfortwoandthreewheelersisverybig.

InFY2015thetotaltwoandthreewheelersoldinbothdomesticandexportmarketsaddupto
19,402,062[
SIAM
].BajajAutossalesrepresentonly19percentofthetotalindustrysales.The
marketistoobigforotherplayerstoproduceenoughvehiclesandachieveeconomiesofscale.
Clearlythisisnotamoatforthecompany.Fromthetablegivenbelowyoucanseethattopfour
playerscontrol90percent[
Autocarpro
]ofthedomesticmarketsalesinOctober2015.If
everyonehasscaleadvantagesthenitdoesntconstituteamoatforthecompany.

Whenyourethinkingaboutcostadvantagesthatstemfromscale,rememberonething:
Theabsolutesizeofacompanymattersmuchlessthanitssizerelativetorivals.Two
massivefirmsthatdominateanindustryforexample,BoeingandAirbusareunlikely
tohavemeaningfulscalebasedcostadvantagesrelativetoeachother.
PatDorsey

Asimpleexampleshouldhelpexplainwhysmallmarketsaremorehospitablethanlarge
onesforattainingcompetitiveadvantages.Considerthecaseofanisolatedtownin
Nebraskawithapopulationoffiftythousandorless.Atownofthissizecansupportonly
onelargediscountstore.
Adeterminedretailerwhodevelopssuchastoreshouldexpect
toenjoyanunchallengedmonopoly.
Ifasecondstoreweretoenterthetown,neither
wouldhaveenoughcustomertraffictobeprofitable.Otherthingsbeingequal,the
secondentrantcouldnotexpecttodriveoutthefirst,soitsbestchoicewouldbetostay

away,leavingthemonopolyintact.
AttheotherextremefromourNebraskatownis
downtownNewYorkCity.Thislargemarketcansupportmanyessentiallysimilar
stores.Theabilityofevenapowerful,well
financedincumbenttoprevententryby
anewcomerwillbelimited.Itcannot,inotherwords,establisheffectivebarriersto
entrybasedoneconomiesofscalerelativetoitscompetitors.

BruceGreenwald

Letusmoveontothe
demandsideadvantages
,thelastsourceofamoat.Alotofinvestors
assumethatifthecompanyhasahighoperatingmargins,thenithasdemandsideadvantages.
Butthatsnottrueashighoperatingmarginswithoutamoatcanbeanephemeralthing.For
havingdemandsideadvantagesacompanyshouldhavecaptivecustomers.Wealreadysaw
thateverybodysmotorcycleislikeeverybodyelses(commoditized).Isthereacustomer
captivityinthemotorcycleindustry?

Takealookattheimagebelow.IntheSportssegment(S1)BajajPulsaristheleader,which
controls44percentmarketshare.Thereiscompetitionineverysegmentincluding,thissub
segment.Pulsarbrandwasintroducedin2001.Howcanacommodityproductenjoyhigh
marketsharewhichhasbeenprofitableformorethan14years?

ThisisbecauseBajajAutocreatedthissubsegment(S1)whichdidntexistbackthen.A
companywhichcreatesanewsubsegmentbyintroducingabrandedproductgetsrewardedby
customerswithaveryhighmarketshare,whichisprofitableanditlastsforaverylongtime.
ThisiswhatHeroHondasSplendordidinthe90sbycreatinganewsegment.Itsellsmore

thanonemillionSplendorseveryyear.RecentlythishappenedtoRoyalEnfield,ownedby
EicherMotors,whichistheleaderintheS2subsegmentwithmorethan90percentmarket
share.

Themotorcycleindustryislessofatechnologyandmoreofamarketingindustry.Itisa
gameofbrands.
Inthevideogivenbelowwatchfrom9:10to16:20minutestoseeRajivBajaj
explainwhytheleaderwhocreatesanewsegmentgetstodominatethemarketforaverylong
time.Init,heanswersmyearlierquestionWhyBajajAutoisaleaderinPulsarandnotin
Discover?

FromthiswecanconcludethatsomeofthesubsegmentslikeS1andS3havedemandside
advantages.WehavetowaitandseehowthecompanyisrepositioningitsDiscoverbrandin
thedomesticmarketstoregainthelostmarketshare.Themotorcycleindustryishighly
competitivebothindomesticandexportmarkets.Butby
specializingandbranding
the
companyisabletocreatedemandsideadvantages.HenceIamassigninga
narrowmoat
for
BajajAuto.

Management

Takealookatthetablegivenbelow.Whatdoyousee?From[2005to2015]saleswentupby
3.5times.Operatingprofitwentupbyalmost5timesandexportscontributiontooverallsales
wentupfromlessthan10percentto44percent.Howdidthishappen?Thishappenedbecause
ofthestrategycreatedbyRajivBajaj,whoistheManagingDirectorofthecompany.Iwould

urgeyoutoreadtheForbesarticle
TheComebackKid
whichtellstheentirestoryabouthow
RajivBajajtransitionedadomesticscootercompanytoaworldclassbrandedmotorcycle
company.

HerearefewthingsthatIlearntabouthimbyreadingtheannualreportsandlisteningtohis
talks.

1. RajivBajajunderstandstheessenceofstrategy.AccordingtoMichaelPorterthe
essenceofstrategyischoosingwhatnottodo.Hesethimselftobecomeaworldclass
manufacturerofmotorcycles.Theonlywaytoachievethatgoalistofocussolelyon
motorcycles.Soheexitedthescootersegmentandspecializedinmotorcycle
manufacturing.
2. Growingthemarketshareisveryimportant.Butitshouldnotcomeattheexpenseof
profits.Theonlywaytocreateprofitablemarketshareistoestablishbrands.Abrandis
somethinguniquethatispositionedinthemindofthecustomerandheiswillingtopay
upfortheproduct.Brandsgetdiffusedandlosespricingpowerifyoutrytocreatetoo
manyofthem.Theykeyistohavefewcorebrands[KTM,Pulsars,Discover,Boxers]
andnotstrayawayfromthecore.
3. Capitalismguaranteesthatcompetitorswillemergelikebeestohoneyandwilltrytotake
awayyourmarketshare.Aftercreatingabrandyouneedtoadoptastrategytodefend
yourprofitshare.Hereareafewstrategiesthatheusestogrowsalesanddefendprofits
intheexportmarkets.

Sno

ExportMarkets

Strategy

SriLanka,Bangladesh,
andcountriessimilarto
India.

ForcountriesthataresimilartoIndiasellthebrands
likePulsarandDiscoverthataresuccessfulinIndia.
Andhopetoachievethesamesuccessthere.

Philippinesandother
ASEANcountries

ThemarketsaremorecompetitivethanSriLankaand
Bangladesh.Theentrystrategyistopartnerwitha
playerlikeKawasakiwhohasafabulousdistribution
network.AndpushbrandslikePulsarintotheexisting
network.

Brazil

MarketslikeBrazilarematureandmuchevolved.Itis

hardtosellbrandslikePulsarandDiscoverinthese
markets.Inthesemarketsthecompanysellwellknown
WesternbrandslikeKTM.Ithasasubsidiarynamed
BajajAutoInternationalHoldingswhichisaJV
betweenBajajandKTMwithashareof48:52.KTMan
Austriancompanyisthe2ndlargestmotorcycle
manufacturerintheEurope.Thecompanyisbasedin
Austria.
4

Africa

Itisacostconsciousmarket.Chineseplayerdominate
themarketbysellingcheapmotorcycles.Thestrategy
hereistodotheoppositeofwhattheChineseare
doing.Ifheis[slowthenbefast],[cheapthenbe
expensive],[fuelefficientthenbepowerful].The
companysellsBoxermotorcycleswhichsellsat50
percentpremiumofChinesemotorcycles.

Thecompanyhas28.94croressharesoutstanding.Andtheyhaventissuedanynewsharesin
thelastfiveyears.Takealookatthetablegivenbelow.From[2009to2015]BajajAuto
generatedRs15,612croresinoperatingcashflows.Around48percentwasreturnedbackas
dividendstotheshareholders.

ItinvestedRs1,109croresbackintothebusiness.Thisinturngeneratedanadditionalpretax
operatingprofitofRs16,000crores.Thistellsmeacoupleofthings
(1)
itdoesntneedalotof
capex[assetlight]togrowitssalesandprofits
(2)
excesscashgeneratedbythebusinesscant
bereinvestedbackintothebusinessathighratesofreturn.

Asof30Sep2015thecompanyhasclosetoRs10,000croressittingontreasuryassets.With
negligibledebtinthebalancesheetIamnotsurewhythecompanyneedstokeepsomuchin
treasuryassets.Overall,Idontseeanyissueswiththemanagement.AndIhavebecomeabig
fanofRajivBajaj.Ifthereisoneriskwiththemanagementitsakeymanrisk.

Valuation

Asof30Sep2015thecompanyhadRs83innetoperatingassetspershareandRs350innet
financingassetspershare.SothetotalbookvaluepersharecomestoRs433.Thelastfew
yearshavebeenreallychallengingforthedomesticmotorcycleindustry.Ontopofthisthe
companyisfacingissueswithitsDiscoverbrand.Letsassumethattheindustrywillturnaround
andBajajAutowillclock15percentincreaseinsalesforonemoreyear.

WiththisassumptionitwillhaveanetsalesofaroundRs25,000crores.Assumingthatthe
companywillbeagoingconcernwithanearningpowertogenerate18percentpretaxoperating
margin.ItwillgenerateRs3,150croresaftertax(30percenttaxrate).Onapersharebasisthis
translatestoRs109.
Ifyouareexpectinganaftertaxyieldbetween7to10percent,then
theintrinsicvalue(nogrowth)ofBajajAutowillbebetweenRs1,440toRs1,906.

AftertaxoperatingEP S = Rs109
At10percentyieldoperatingassetswillbeworth = Rs109 * 10
[Multiplyby14.28for7percentyield]
At10percentyieldoperatingassetswillbeworth = Rs1, 090
I ntrinsicvaluepershare(10percentyield) = Rs1, 090 + Netfinancingassetspershare
I ntrinsicvaluepershare(10percentyield) = Rs1, 090 + Rs350
I ntrinsicvaluepershare(10percentyield) = Rs1, 440

Theautoindustryisextremelycompetitive.AndthemoatofBajajAutoisverynarrow.SoI
wouldntpayanythingforgrowth.ThecurrentsharepriceofBajajAutoisRs2,412.EvenifI
considerthehigherbandofintrinsicvaluethecurrentpricehas20percentgrowthinit.WhenI
calculatedtheintrinsicvaluewithoutgrowthweassumedthatthecompanywillmaintainapre
taxoperatingmarginof18percent.Ifcompetitionforcesthecompanytoreducethemargins,
thenitwillresultinpermanentlossofcapital.

Disclaimer:IhaveasmallpositioninBajajAuto.ThisisnotarecommendationtoBuy,
Sell,orHold.IamnotaSEBIregisteredanalyst.Iwrotethisdocumenttoorganizemy
thoughtsanddeepenmyunderstandingaboutthecompanyandindustry.Iamsharingit
sothatyoucanlearnsomethingfromthis.

Author : Jana Vembunarayanan

Website :
https://janav.wordpress.com
Twitter :
@jvembuna