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Milestone year led by market share focus in India

Competitive intensity to remain high; Watch out for action in ‘Commuter’ segment

Our analysis of Bajaj Auto’s FY19 annual report highlights the company’s strategic intent, update on the key export markets and outlook for the 2W industry. Key insights from the annual report:

* BJAUT expects BS6 to be the joker in the pack; there is risk of a price war if BS4 inventory is high in 2HFY20. It plans to comply with BS6 norms earlier than the deadline.

* The company believes the domestic market will get more competitive across various segments, as it expects segmental quasi-monopolistic control to end.

* While it expects the ‘Entry’ and ‘Premium’ motorcycle segment to grow, it is currently focusing on cracking the code for the large ‘Commuter’ segment.

* In exports, BJAUT aspires to become a true global motorcycle specialist by getting into the ‘consideration set’ of a customer looking to buy motorcycles in any part of the world.

* India is now the biggest market for KTM, driven by the launch of Duke 125.

Valuation & view:

BJAUT’s FY19 annual report reinforces its focus on market share and its willingness to compete in the domestic motorcycle segment to gain share. BJAUT’s strategic shift—of prioritizing market share over margin – is reflected in substantial market share gain in domestic motorcycles (~300bp in FY19), albeit at expense of margins (~270bp decline in FY19). Post the recent run-up in the stock price, its valuations at ~17.1x/15.5x FY20/21 consol. EPS is a fair reflection of the tepid earnings growth expectation (~6% CAGR over FY19-21E), especially considering the expected turbulence due to BS6 transition. Maintain Neutral.

BS6 could influence outlook for domestic 2Ws

* It expects BS6 to be the joker in the pack due to restrictions on sale of BS4 vehicles from 1st Apr’20.

* BJAUT plans to comply with BS6 norms some months earlier than the deadline. But, price war could break out while clearing the BS4 vehicle inventory, especially if competitors are saddled with high BS4 inventory levels in 2HFY20.

* Hence, company expects near-term outlook to remain healthy, as long as there are not t oo many major market disruptions on account of BS6.

Expects heightened competitive landscape

* It expects the domestic market to get more competitive across various segments, as it expects the segmental quasi-monopolistic control to end.

* BJAUT expects to compete with such competition through its operational nimbleness and cash surplus of over INR160b.

* Also, its diverse presence across exports and 3Ws makes it less prone to acute competitive pressures of the domestic market, with success dependent on its ability to have new and exciting models.

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