Company Analysis

Bajaj Auto Limited

Submitted to: Submitted by:-

Mr. T Vishwanathan Group No-3
Nitin Baranwal(55)
Pankaj Wadhwan(57)
Rajni(68)
Raunaq Oberoi(70)
Sakshi Malik(75)
Company Name – Bajaj Auto Ltd.

Chairman – Rahul Bajaj

Chief Executive Officer (Two Wheeler) – S. Sridhar

Annual Turnover – Rs.120 billion

CRISIL Rating – Rating Outstanding as on 15-Nov-2010

Instrument Category Rating

 Long Term AAA 

 Fixed Deposit FAAA 

 Short Term P1+ 

In this report we will be analyzing BAJAJ AUTO LTD. which has emerged as the biggest two wheeler manufacturer in
India in the recent times and also as the biggest competition to the Hero Honda group.

The Bajaj Group is amongst the top 10 business houses in India. The company is well known for their R&D, product
development, process engineering and low-cost manufacturing skills. The company is the largest exported of two and
three-wheelers in the country with exports forming 18% of its total sales . Its footprint stretches over a wide range of
industries, spanning automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance,
travel and finance.

The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer
and the Bajaj brand is well-known across several countries in Latin America, Africa, Middle East, South and South East
Asia.

Founded in 1926, at the height of India's movement for independence from the British, the group has an illustrious history.
The integrity, dedication, resourcefulness and determination to succeed which are characteristic of the group today, are
often traced back to its birth during those days of relentless devotion to a common cause. The present Chairman of the
group, Rahul Bajaj, took charge of the business in 1965. Under his leadership, the turnover of the Bajaj Auto the flagship
company has gone up from Rs.72 million to Rs.120 billion (USD 264 million), its product portfolio has expanded from
one to and the brand has found a global market.

Business Risk Analysis

Market Position

Product profile and sales breakup

Bajaj Auto Ltd. (BAL) caters to a large chunk of Indian population. Its varied product range comprises Motorcycles and
Mopeds.
The product range includes –

Motorcycle –

 Pulsar Digital Twin Spark Ignition Motorbike

o Pulsar 150 DTSi
o Pulsar 180 DTSi
o Pulsar 220 DTSi
o Pulsar 135LS

 Pulsar 220 Digital Twin Spark Ignition Motorbike

o Pulsar 180 UG
o Pulsar 150 UG

 XCD DTS-Si Motorbike

o XCD 125 DTS-Si
o XCD 135 DTS-Si

 Platina Motorbike
o Platina 100 cc.
o Platina 125 DTS-Si

 Discover Motorbike
o Discover 135 DTS-Si
o Discover 100 DTS-Si

 Avenger DTSi Motorbike

Mopeds –

 Kristal DTSi

The company classifies motorcycles into three segments, based on consumer categories and approximate price points.
These are:
a) Entry segment. These are typically 100 cc motorcycles at a price point in the neighborhood of Rs.35,000. Bajaj Auto is
in this segment through the Plating. Here, Bajaj Auto has been a major player and, despite an overall market de-growth,
accounted for 34% of this segment in India in 2009-10.

b) Executive segment. This largely comprises 100 cc to 135 cc motorcycles, priced between Rs.40,000 to Rs.55,000. They
are in this segment with two brands: XCD and Discover.

c) Performance segment. These are sleek, high performance, with price points in excess of Rs.55,000. BAL is present
here with their flagship brand, the Pulsar, and their cruiser, the Avenger. They dominate this space, with a domestic
market share in excess of 47%.
 Chart 1: Major Players of two wheeler industry and market share

Others 6%
LML 7.2% Bajaj Auto
21%
TVS 16.3%
Domestic Sales:
Kinetic % Hero
The highlights are as under:-

Units 2008-09 2009-10

Two-wheelers 1,919,62 2,511,643
5
Three-wheelers 274,529 340,937
Total 2,194,15 2,852,580
4
Of which exports 772,519 891,002

The company's standalone topline grew by robust 50% to Rs 4341.82 crore in Sep 2010 quarter backed by record high
sales volume of over 1 million vehicles. The total sales volume grew by 46% to 1000570 vehicles in Sep 2010 quarter.
Out of this, the motorcycle sales grew by 47% to 883494 units representing the highest quarter sales in motorcycle for the
company. However it was limited by production constraints. The brands Pulsar and Discover contributed over 86% to
total domestic motorcycle sales. Nevertheless, the plant II at Pantnagar commenced production from 8 th Oct 2010
increasing the motorcycle capacity to 15 lakh units per annum at that plant. Also the three wheeler sales volume grew by
37% to 117076 units, amounting to be the highest quarterly three wheeler sales volume for the company .

Richer product mix and increased volumes reduced the impact of increase in raw material cost on margin. The operating
profit margin (OPM) slipped by 140 bps to 20.7% limiting the operating profit growth to 41% to 897.17 crore. In terms of
cost, as % to sales net stock adjusted, the raw material cost increased by 420 bps to 67%. Also the purchase of traded
goods increased by 10 bps to 4%. On the other hand, the other expenditure slipped by 200 bps to 6% and staff cost by 110
bps to 3%.

The company's PBT grew by robust 52% to Rs 950.28 crore backed by other income and depreciation cost. The
depreciation cost fell by 11% to 29.95 crore while the other income surged by whopping 285% to Rs 83.71 crore. The
interest cost stood at Rs 0.65 crore (against nil in Sep 2009 quarter). With nil EO expense (against Rs 45.83 crore in Sep
2009 quarter) and 200 bps fall in effective tax rate, the net profit grew by impressive 69% to Rs 682.08 crore.

Exports:

Product-wise Exports of Bajaj Auto (in numbers):

Product 2008-09 2009-10 Growth

Motorcycles 631,383 725,023 15%
Total two- 633,463 726,115 15%
wheelers
Three-wheelers 139,056 164,887 19%
Total vehicles 772,519 891,002 15%

The increased presence in Africa was primarily due to growth in Nigeria, Uganda, Angola and Kenya. Bajaj Auto has
initiated a major brand-building effort in Africa for the Boxer, which involves creating exclusive branded outlets for the
customers in terms of sales and after-sales services.

Sales in South Asia (excluding India) grew by 4%. The slowdown in Sri Lanka for three of the four quarters was more
than compensated by growth in Bangladesh. Due to the fall-out of the financial crisis, South-East Asia had a negative
growth of 14%. The Company's subsidiary in Indonesia, PT BAI, clocked sales of 11,954 units.
Although the Company's sales to Latin America recovered in latter half of 2009-10, the year as a whole was worse
than before. Adverse economic conditions led to the region's sales de-growing by 7%. However, given Bajaj Auto's
strong brand presence in these markets, it is expected that the Company will increase sales as the Latin American
markets improve in 2010-11.

Three-Wheelers:

In 2008-09, Bajaj Auto had witnessed a 12% drop in domestic sales. 2009-10 saw a reversal. Like motorcycles, the
Company's domestic sales of three-wheelers also picked up. Thanks to this, as well as growing export demand (see
Table above), the overall decline of three-wheeler sales that
occurred in 2008-09 has become a thing of the past.
2009-10 saw a 24% growth in the number of Bajaj Auto three-wheelers sold - up from 274,529 units in 2008-09 to
340,937 in 2009-10. As always, the Company remains the leading three-wheeler player from India with a market share
of over 55%.

Strength, Weakness, Threats and Opportunities

Strengths:
  Highly experienced management.
 Product design and development capabilities.
 Extensive R & D focus.
 Widespread distribution network.
 High performance products across all categories.
 High export to domestic sales ratio.
 High economies of scale.
 High economies of scope.
Weaknesses:
 Hasn’t employed excess cash for long.
 Still has no brands to match Hero Honda’s Splendor in commuter segment.
Threats:
 The competition catches up any new innovation in no time.
 Threat of cheap imported motorcycles from China
 Margins getting squeezed from both directions (Price as well as cost)
 TATA Ace is a serious competition for the three-wheeler cargo segment.
Opportunities:
 Double-digit growth in two-wheeler market.
 Untapped market above 200 cc in motorcycles.
 More maturity and movement towards higher-end motorcycles.
 The growing gearless trendy scooters and scooterette market.
 Growing world demand for entry-level motorcycles especially in emerging markets.

Demand and Supply Dynamics

The market demand for two wheelers has increased significantly with sales recording as high as 52% in the sector.
The two wheeler industry is capital intensive with large fixed cost requirements and new model introductions mandatory
at frequent intervals in order to sustain the demand. This involves substantial design and R&D costs. Such high fixed costs
can be offset only by achieving economies of scale. BAL has a working capital of around Rs. 5452.48 crore, which is
managed very well and can anytime be employed to increase the production of more number of units. Moreover, a
developed distribution channel is extremely beneficial in meeting the market demand. Bajaj Auto's vehicle manufacturing
capacity stands at 3.96 million units - comprising 3.6 million two-wheelers and 360,000 three-wheelers. The newest plant
at Pantnagar (Uttarakhand) has a capacity to produce 900,000 two-wheelers.

Plant-wise capacities (in numbers): Plant 2008-09 2009-10

Waluj 1,860,000 1,860,000
Chakan 1,200,000 1,200,000
Pantnaga 900,000 1,200,000
r
Total 3,960,000 4,260,000

Pantnagar:

Bajaj Auto's production at its Pantnagar plant, Uttarakhand, has been on the rise. In 2009-10, it produced 577,947
vehicles, up by 82% compared to 2008-09. Average production at Pantnagar for January-March 2010 was 60,000
per month versus 30,000 per month a year earlier. The plant is now geared to produce 80,000 units per month in April-
June 2010, and then ramp up to 120,000 vehicles per month by September-December 2010. Keeping this in
mind, the supply chain activities are also getting geared up.

To maximise tax benefits available at Uttarakhand, the Company has shifted products like Discover and Pulsar 135 to
Pantnagar.
Waluj:

Waluj celebrated its 25th birthday in 2009-10. It also started production of the Discover and successfully ramped up the
output. Waluj is now the export hub of Bajaj Auto. Of the 891,002 units of two-and three-wheelers
exported in 2009-10, about 80% was produced at Waluj. The plant is now ready to meet even higher exports - up to 1
million units of two-wheelers and three-wheelers.

Waluj won an award: Plant Best In Class Manufacturing Leadership Award for Two-Wheelers' by the Stars of Industry
Group.

Chakan:

Given its core competence in high-end products, Chakan produced various upgrade versions of Pulsar. It is now ready
to deliver the new KTM bikes. Chakan was awarded the Super Platinum Award for Manufacturing Excellence'
by Economic Times-Frost & Sullivan.

Table gives the data on which products are manufactured in what plant.

Activities Across the Various Plants:

Plant Products
Waluj Boxer, Platina, Discover and three-wheelers
Chakan Pulsar, Avenger and Discover
Pantnaga Platina, Platina 125, Discover and Pulsar 135
r

Competition

The major competitors for BAL are Hero Honda Motors Limited, Tata Motors and Yamaha Motors. In the entry segment
which are typically 100 cc motorcycles at a price point about Rs. 35,000 while Hero Honda is having a market share of
about 41% in the segment with CD Dawn, CD Deluxe and Splendor, BAL has only 27% of market share with Platina and
Discover. Earlier, BAL introduced Boxer and Boxer CT in to compete with Splendor and CD Dawn, but despite being
very fuel efficient, Boxer failed to attract the buyers because of its poor aesthetics. But Platina and Discover increased
BAL’s market share and have been doing good business since the launch. However, there is a need for BAL to introduce
some more bikes in this segment.

Executive segment largely comprises 100 cc to 135 cc motorcycles, priced between Rs.40,000 to Rs.50,000. Bajaj Auto is
in this segment with two brands: XCD and Discover. These bikes are giving tough competition to Hero Honda’s Splendor
NXG and Glamour. Here Bajaj is leading the tally with a whopping market share of 41% as compared to the Hero
Honda’s market share of 39%. Yamaha with its Alba, Crux and Gladiator and TVS with Victor, as the most successful
models are nowhere in close competition.

In performance segment, the Pulsar and Avenger from Bajaj house are the most successful bikes of the year 2008. They
dominate this space with a domestic market share in excess of 47%. The introduction of DTSi and DTS-Si technology by
BAL was the major factor deciding their dominance because with the aesthetics, the mixture of latest and advanced
technology and fuel efficiency in these bikes have helped BAL to replace traditional rival Hero Honda with its Karizma
from number one spot in the segment.

In the power sector i.e. 200 cc plus, BAL has introduced Pulsar 220 cc which is far more superior in technology and fuel
efficiency and power than the rival’s Karizma Sport (Hero Honda) and R15(Yamaha).
 Table 3: Bajaj products and competitors
Bajaj Auto Ltd. Product Competitor
Discover 100 cc CD Deluxe (Hero Honda)
Platina 100 cc CD Dawn (Hero Honda)
Crux (Yamaha)
Alba (Yamaha)
XCD 125 Splendor (Hero Honda)
XCD 135 Splendor NXG (Hero Honda)
Discover 135 Splendor Plus (Hero Honda)
Platina 125 Glamour (Hero Honda)
Gladiator (Yamaha)
Graffiti (Yamaha)
G5 (Yamaha)
Pulsar 150 CBZ Extreme (Hero Honda)
Pulsar 180 Achiever (Hero Honda)
Hunk (Hero Honda)
Karizma (Hero Honda)
FZ16 (Yamaha)
Fazer (Yamaha)
FZS (Yamaha)
R15 (Yamaha)
Pulsar 220 Karizma Sport (Hero Honda)
MT-01 (Yamaha)
R1 (Yamaha)
Kristal Scooty PEP (TVS)
Activa (Hero Honda)
Dio (Hero Honda)
Pleasure(Hero Honda)

Bajaj Auto has been sitting on a cash pile for over five years now. Over the next couple of years, competition in the two-
wheeler market is set to intensify. TVS Motors and Hero Honda are on a product expansion binge. To fight this battle and
retain its hard-earned market share in the motorcycle segment, Bajaj Auto will need its cash muscle.

Distribution Network
BAL now is taking a leaf out of the FMCG business model to take the company to greater heights. Bajaj has kicked off a
project to completely restructure the company's retail network and create multiple sales channels. The company has set-up
separate sales channels for every segment of its business and consumers. Bajaj Auto's entire product portfolio, from the
entry-level to the premium, was being sold by the same dealers. The restructuring involves separate dealer networks
catering to the urban and rural markets as well as its three-wheeler and premium bikes segments. Bajaj Auto also plans to
set-up an independent network of dealers for the rural areas. The needs of financing, selling, distribution and even after-
sales service are completely different in the rural areas and do not makes sense for city dealers to control this. The
company also plans to set-up exclusive dealerships for its three-wheeler products instead of having them sold through an
estimated 300 of its existing dealers.
The company has recently launched its high-end bike dealership — Probiking — and is now in the process of categorising
its existing 479 dealership network into urban and rural dealerships. This is being done to cater to the different needs of
the rural and urban customer in terms of product, infrastructure, working capital, financing, servicing and most
importantly distribution. According to the new strategy, Bajaj will have four dealer channels. While Probiking will retail
the 180cc plus high end motorcycles, there will be a series of urban two-wheeler dealers and rural two-wheeler dealers.
Three-wheeler dealerships will be the fourth dealership network. Currently, Bajaj has over 1,300 service dealers across the
country and 1,250 rural outlets. The firm recorded sales of over 1.8 million units during the year ended March 31, 2005.
Last month, Bajaj announced that it would be setting up Bajaj Probiking showrooms, which will be equipped with
dynamometers or test ride simulators used in the company’s R & D labs.
Price and Margin Trends

Thanks to a decline in metal prices and other key raw materials, Bajaj Auto more than doubled its net profit to over Rs
800 crore during the September 2010 quarter. The company claims it to be its best-ever results. The market’s concerns
relate probably to the great traction in the company’s revenues and unit sales. In the quarter, the company’s units sales
were up by just 7.3% year-on-year (Y-o-Y), while net sales grew by a little over 15%, aided by a 7.6% improvement in
blended sales realisation to Rs 40,674.4 per unit, including three wheelers. While the company claimed that better
realisations were on account of better product mix in its two-wheeler business, the fact is that its three-wheeler division
reported a higher sales growth. As the sticker price for the latter is higher, this may have helped realisations, which is
hardly a healthy sign.

The other worry is a sequential decline in sales realisation despite the company’s efforts to increase the share of pricier
and bigger motorcycles in its portfolio. The trend points towards a tough operating environment for the company, given
the recent rise in commodity price, including metals. During the September 2010 quarter, the company’s operating margin
(excluding other income) nearly doubled to 30.7% of net sales, of the best-ever. The company made an operating profits
of nearly Rs 7,900 per unit against Rs 3,800 per unit during the corresponding period last year and Rs 6,028 in the June
2010 quarter. Going forward, we expect the company to report high growth in units sales due to positive response to its
new product launches. However, it would be tough for it to maintain the operating margin at its current level. At its
current price, the stock is trading at nearly 25 times its trailing 12 months earnings and looks pricey by historical
standards.
Operating Profits stood at Rs 455.4 crore, improved by 71% y-o-y and by 59% q-o-q. This was the highest ever Operating
Profit reported by the company. The Operating profit margins improved by 793 bps y-o-y and by 430 bps q-o-q to 19%.
The major raw material like steel and aluminum contributes ~70% of total raw material cost. BAL has signed an
agreement with multiple supply contracts with raw material providers which has helped the company to keep cost under
control and thereby led to an improvement in the operating performance. Management has guided that the current margins
are not sustainable. We believe that with some signs of increase in the cost of raw material (steel) margins may decline
from the current levels going forward. Also new launch of 150 cc bike would dilute the margins.

Operating Efficiency
Location and Capacity Utilization and Flexibility in Manufacturing
Bajaj Auto Ltd has inaugurated its Greenfield Plant with a planned capacity of one million motorcycles per annum at
Pantnagar, Uttarakhand. Built on a total area of 65 acres with the balance 155 acres allocated to the vendor cluster, the
Pantnagar facility would be the Company's fourth Plant & first Plant outside Maharashtra. In a pioneering manufacturer –
vendor partnership, the Company's Pantnagar Plant will be supported by manufacturing facilities of 16 auto component
vendors in the immediate proximity. A part of the land area allocated to the Company has been taken up by vendors to set
up dedicated facilities to ensure seamless integration with the mother Plant resulting in phenomenal manufacturing
efficiencies.
These cluster suppliers will meet 75% of the component requirement of the new Plant. They would be operating as the
extended factory of the core Company's mother Plant. Systems and processes would make this unit the ultimate "lean"
unit in terms of manufacturing efficiency. All supplies from shops and suppliers will be on e-Kanban. The Pantnagar Plant
is a compact focused manufacturing facility, which despite being the lowest cost production unit would adhere to the
highest global quality standards. This new manufacturing concept is expected to yield 10 times the productivity of other
comparable 2-wheeler units.
This partnership will see manufacturing and supply of Key components including Speedometers from Pricol, Front Fork
and suspension from Endurance, Lighting systems from Lumax, Plastic and Electrical components from Varroc, Control
switches and Ignition systems from Minda group and frames from JBM, in the vicinity of the new Company's Plant.
Another landmark has been broken in terms of the investment required to create a plant with a capacity of 1 million
vehicles annually. The Company has directly invested only Rs 150 crores in this new manufacturing unit for an
investment cost of merely Rs 1500 / vehicle a benchmark perhaps unequaled elsewhere. This will enable one of the
shortest payback periods for any Plant globally.
In 2007, the company was considering the decision to close down its manufacturing plant at Akurdi in Pune as a part of
fine-tuning its manufacturing strategy and for competitive reasons. The Akurdi plant, established in 1960, was the
company's oldest facility.2 However, the dynamics of competition and the demands of operational efficiencies had
necessitated the change to close down the manufacturing plant. The company intended to shift the production of its
scooter, the Kristal, from Akurdi to its Waluj facility at Aurangabad. The company had earlier shifted the production of its
motorcycle, the Platina, from this facility to Waluj. The decision to move production from Akurdi was motivated by the
fact that the plant had become unproductive despite the best efforts of workers and the management. Moreover, the
absence of tax benefits, an ageing workforce, octroi charges, and logistics issues associated with the Akurdi plant
translated into increased costs for the company. Bajaj had three other manufacturing facilities as well. These were located
at Waluj, Chakan (near Pune), and at Pantnagar (in Uttarakhand). The Chakan facility had established itself as a
benchmark for cost efficiency, innovation, and competitiveness while the Pantnagar facility was considered to be modern
and enjoyed the benefits offered by the state government (that were aimed at attracting automobile companies to set up
base in that region). Shifting a significant portion of the manufacturing of the company's economy range of bikes to
Pantnagar, a tax free location, would lead to savings of approximately Rs.5,000 to Rs. 6,000 per bike. 3 This would enable
the company to meet competition in an effective way, especially in the entry level 100cc market segment where the
competition was intense. The decision to move operations from Akurdi had to be considered in light of streamlining the
manufacturing strategy of the company as a whole. Keeping in view the advantages of manufacturing at Pantnagar, the
unit had been given the target of manufacturing around 2,000 bikes per day of the entry-level 100cc Platina and the
company was in the process of shifting a part of the production from its Waluj facility.

Raw material

Raw material purchase for the year 2009

Unit of Product
Product Name Year Product Quantity Cost/Unit -Unit Curr.
Measurement Value
Other Components 2010 NA 0.00 7,294.21 0.00
Others 2010 NA 0.00 39.84 0.00
Non Ferrous Metal 2010 MT 915.00 8.04 87,868.85
Tyre/Tubes 2010 No 11,964,101.00 296.15 247.53
Ferrous Metal 2010 MT 16,464.00 61.87 37,578.96
Ferrous Metal 2010 Mtr 617.00 0.00 0.00
Engineering products 2010 NA 0.00 0.05 0.00
Auto Spare Parts-
2010 NA 0.00 419.76 0.00
Purchased
Auto Spare Parts-
2009 NA 0.00 374.08 0.00
Purchased
Engineering products 2009 NA 0.00 0.28 0.00
Ferrous Metal 2009 MT 13,754.00 57.34 41,689.69
Ferrous Metal 2009 Mtr 292.00 0.00 0.00
Tyre/Tubes 2009 No 6,096,951.00 119.13 195.39
Non Ferrous Metal 2009 MT 1,292.00 15.51 120,046.44
Others 2009 NA 0.00 37.22 0.00
Other Components 2009 NA 0.00 5,838.07 0.00
Other Components 2008 NA 0.00 6,145.35

Table 5: Products and Suppliers

Product Supplier
Speedometers Pricol
Front fork and Suspension Endurance
Lighting Systems Lumax
Plastic and Electrical Varroc
Components
Control Switches Ignition Minda Group
 System
Frames JBM

Bibliography

1. www.capitaline.com
2. www.indiainfoline.com
3. www.hoovers.com
4. Automobile India, ‘Two Wheelers in India’,
http://automobiles.indiabizclub.com/info/automobile_types/two_wheelers. Last accessed on December 07, 2008.
5. http://www.bajajauto.com/press-release/PRESS_RELEASE_FOR_SEPTEMBER_2010.pdf
6. Economic Times, 'Two Wheeler Industry- Facing a crisis?',
http://economictimes.indiatimes.com/articleshow/msid-2461907,prtpage-1.cms. Last accessed on March 20, 2008.
7. Automobile India, ‘Overview of Two Wheelers’, 2007, http://www.automobileindia.com/two-
wheelers/overview.html. Last accessed on March 20, 2008.
8. Neha Kaushik, 'Ungeared for growth', The Hindu Business Line , Feb 9, 2006,
http://www.thehindubusinessline.com/catalyst/2006/02/09/stories/2006020900030100.htm. Last accessed on
March 10, 2008.