bajaj auto limited's business strategy from market leader to follower

Bajaj auto limited's business strategy from market leader to follower

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21 March 2006 Sector: Automobile Company Report Global Equity Research - India Vijay Sarthy vijay.sarthy@karvy.com Bajaj Auto (Rs2,706) Out Performer Discovered growth Target Price Rs3,200 In the last four years, the theme of Bajaj Auto has been the process of "change"- of the ways in which the company has transformed itself to successfully face competitive challenges in the market. The fact that the company has imbibed the habit of outgrowing industry emanates from its ability to create new product markets at various attractive price points with technologically superior product, better style and engineering excellence which suits customer preferences thereby ensuring proper product-customer fit. We believe that this strategy is just the beginning and one can witness more of such initiatives in the times to come which convince us to believe that the company is more likely to post robust growth rate and garner higher market share. Also, the company's thrust on exports growth, the aggressive products launch strategy in scooter market and higher expected growth in three-wheelers would lead to compounded annual growth of 18- 20% in total volume sales over the next two-three years. Creating new product markets - the way to outgrow: The core strategy of Bajaj Auto in motorcycle market is to create new product markets at various price points and at the same time ensure proper product attribute-customer needs fit. The recent launches of Discover 125cc and 112cc (priced at Rs 42,000 and Rs 38,000 respectively) are a step in that direction. Holding cost-competitive products in its portfolio, these bikes are not only attractively priced but also offer better performance in terms of fuel efficiency, mileage, power and style. Discover 125 cc, gives the mileage of an executive segment vehicle and looks of Pulsar while Discover 112cc gives the mileage of CT 100 retaining the style and engineering attributes of its elder sibling goes a long way in competing with Hero Honda. We believe that the future launches would be in the same line which would thereby continue to outgrow others and garner higher market share. Continue to witness robust growth: We expect the two-wheeler industry to grow at a CAGR of 14-15% in the next two years. Continuing to sustain its leadership in entry and premium segment, the company has shown stiff competition in the executive segment with the launch of Discover twins and its share in the segment has gone up to 22%. With its core strategy to create new product - markets, strong re-entry in scooter segment and thrust on exports, we expect the company to post a 20% CAGR volume growth in the next two years. With this backdrop, we expect the topline to grow at 22% compounded annually leading to margin expansion of 150 bps over the next two years. With debt/equity ratio at comfortable level of 0.33 and expect ROE (%) from 23.0% in FY06 to 25% by FY08. To ensure such growth it has announced capex plans to the extent of Rs 15bn for setting up greenfield projects for its two and three wheeler expansion and foray into four wheelers. Valuations:
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Bajaj auto limited's business strategy from market leader to follower

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