My thoughts on Bajaj Auto

Recently had a round in a job interview where i was told to write my thoughts on the
company Bajaj Auto.

Unfortunately my write-up was unable to allow me to progress to the next round, nevertheless i have decided to attach my write-up on the blog while biding my time to write some other articles.

*Personally i do feel that my write-up was pretty bad but if given another chance to re-write it, i am not sure if i would have wrote it much different. I guess i still need more practice and advice.

Introduction

Bajaj Auto is an Indian automobile manufacturer company. The company mainly focuses on 2 wheelers, 3 wheelers as well as 4 wheelers .

In the 2 Wheelers segment which is segregated into Scooters and Motorcycles, Bajaj Auto Limited focuses on motorcycles only unlike some of its competitors. The company believes that it is unable for the company to focus on all segments and hence decides to not go into scooters. In the Motorcycles segment, the bikes are segregated into few segments namely Entry-Level(represented by its bikes such as Platina, CT 100 and Discover 100/110), Commuter and Commuter Deluxe Segment (Discover 125 and V), Sports(Pulsar and Avenger) as well as Super Sports Segment (Dominar 400, Pulsar RS200 and KTM). Its main competitors in the 2 wheelers segment include Hero Motocorp, TVS Motor and Honda. According to SIAM, in 2017-2018, 2 wheelers accounted for 69.67% of automobile  exports by India as well as 80.85% of automobile domestic sales in India. Bajaj Auto is currently the 2nd largest company in the Motorcycle Segment in terms of Market Share.

In the 3 Wheelers segment, Bajaj Auto is the world's largest manufacturer as well as largest exporter in India. ITs main competitors in the 3 wheelers segment include Atul Auto, Piaggio, Mahindra and Mahindra, Scooters India Limited, TVS Motors . According to SIAM, in 2017 to 2018 , 3 wheelers accounted for 9.43% of automobile  exports by India as well as 2.54% of automobile domestic sales in India.

The company currently operates both domestically and via exports. Exports accounted for 39.3% of revenue in FY18. The percentage has largely fluctuated over the past 5 years due to currency devaluation but has grown to be a higher proportion when compared across 10 years.

Rajiv Bajaj is the Managing Director of Bajaj Auto since 2005. He has been widely accredited with introducing the Pulsar range of motorcycles and spearheaded the turnaround of the company. The Pulsar is known for its bikes being value for mileage, cool looks, easy availability of repair centres as well as value for money.

In an interview published in 2011, he said that 'brands have pricing power and a brand is actually a product that creates a new category'. The Pulsar succeeded and became a brand that created new category which included other bike products like the Platina. Another interview in 2018 by Businessworld revealed that Bajaj’s current priority is the application of the scientific principles of Homoeopathy to the task of building a brand centred strategy at Bajaj Auto to make it one of the world’s leading motorcycle manufacturers. The company also practises total productive maintenance to improve the quality and productivity of its products, processes and employees. It also extends such practises to its vendors.

Financials

Positives

-Healthy Financial Ratios. The financial health at Bajaj Auto is healthy. The company has pared down its debts since FY 2017 and remained above 1 in both quick and current ratios. The fall in current and quick ratios in 1H 2019 is largely due to a shift in investments from current assets  to non-current assets. Equity to Asset ratio has increased over the years, reflecting lesser % of liabilities in the balance sheet.

Year	FY 2014	FY 2015	FY 2016	FY 2017	FY 2018	1H 2019
Current Ratio	1.18	2.12	1.56	2.92	2.24	1.44
Quick Ratio	1.05	1.94	1.15	2.69	2.06	1.32
Debt: Asset Ratio	0.401%	0.72%	1.03%	0%	0%	0%
Equity: Asset     Ratio	65.14%	68.70%	78.42%	81.83%	80.2%	76.72%

-Free Cash Flow generation. The company's net cash from operating activities has been positive since 2014. However, in some years such as 2017, the company has not been able to have a positive net change in cash and cash equivalents. This is largely due to the purchase of investments.

Concerns

-Investments form bulk of the balance sheet. For a company that mainly does automobile manufacturing, it is indeed surprising that a large part of the balance sheet is made up of Investments. The Investments stood 68.7% of Assets in FY2018 which is a increase from 57.97% in FY 2014. These investments include investments in subsidiaries and goodwill on above investment as well as others which include fixed maturity plans, short term mutual funds, bonds & debentures. The others segment has increased over the years, forming 86.61% of investments and 68.70% of Assets in FY2018 as compared to 85.59% of investments and 49.24% of Assets in FY2014.  The company has an investment policy which allows them to only invest in products with credit rating equal to or above AA+ and P1+. Even though the company is allowed to invest in high ratings product,  these products are not capital guaranteed and the company is susceptible to credit quality and default risk of various underlying securities.

- Falling EBITDA Margins. The company's EBITDA Margins have been on a downwards trend. In 1H 2019 it has hit 18.2%. In its analyst briefing for 1H FY19, Management has said that the lower margins is due to its entry level segment's margins being largely lower. The Platina model is in single digit range while CT Model is loss making. This is in lieu with the business strategy of its entry price segments where Bajaj Auto has cut its selling prices in the entry level segment to gain market share. This strategy seemed to be contradictive as in an interview with Mint in 2010, Rajiv Bajaj has said that 'The numbers game is not important, but profitability is'. Currently the company has shown increased in profits but it remains a worry should further price cuts occur in a rising raw materials environment as this would hurt EBITDA Margins even further.

Business Outlook

-2 Wheel segment market share falling. Bajaj Auto's motorcycle segment has been falling over the years. According to Bloombergquint, the market share has fallen from 24% in FY 2013 to 16% in FY2018. Bajaj Auto had released 6 variants of its Discover Models but it seems like it failed to differentiate itself well. This is echoed by Rajiv Bajaj which said that 'Discover was his biggest blunder and it became a 'me too' product which is bad in life and marketing'. However a silver lining would be that the sports and super-sports segment has seen growth. KTM's India Sales recorded a growth in volume of 32% from FY17 to FY18 as well as showing a CAGR of 44% over last 5 years. KTM's profits has also grown 9.49% from FY17 to FY 18 and a CAGR of 15.43% over last 5 years

-3 Wheel segment subjected to permit requirements. In 2017, the governments of Maharashtra had scrapped permit requirements which allowed a quota of 3 wheelers. This has been a positive for 3 wheel demand in India but many other states such as Delhi still do have permits and local demand will be largely affected by authority's decisions.

-4 Wheel segment getting approval from India Authorities. Qute, Bajaj Auto's quadricycle which has sold in countries in Asia, Europe as well as Latin America is not allowed in India. However this could soon change as in June 2018, quadricycles were approved as a new vehicle category in India. In its analyst briefing for 1H FY19, management has guided it expects to sell significant volume in 2020 and has obtained 18 states approved .

-Automotive Mission Plan 2016-26 (AMP 2026) by Indian Automotive Industry and Govenment of India . AMP 2026 aims to increase the net exports of the Indian Automotive industry by several folds. Possible Plans include improving business climates as well as infrastructures to boost the productivity and attractiveness of the Indian Automotive industry.

Corporate Governance/ CSR Concerns

-Gender Unbalance. Only 1 female on the board of directors(currently 16). Only 3.73% of workforce is female

- Long Tenure of Independent Direcors. 3 Independent Directors seem to have over 10 years tenure in the company. Namely D.S Metha(Since 1998), P Murari(Since September 2006) and Niraj R. Bajaj(Since September 2006). In addition, P Murari has only attended 3 out of 8 meetings in from 2017-18 and 2014-2015

Peer Analysis

EBITDA Margin	FY2014-15	FY2015-16	FY2016-17	FY2017-18	1H 2019
Bajaj Auto	21.2%	22.2%	21.7%	20.2%	19.7%
Hero Motocorp	12.84%	14.51%	16.26%	16.38%	15.4%
Atul Auto	11.82%	14.45%	12.68%	13.51%	13.49%

Despite a falling trend in margins from FY 14-15, Bajaj Auto has still managed to maintain higher margins compared to its 2 wheel rival (Hero Motocorp) and 3 wheel rival (Atul Auto). Hero Motorcorp is the market leader in 2 wheels and would be an appropriate comparison. In the 3 wheel space, the 2nd and 3rd in market share are Piaggio and Mahindra and Mahindra Limited but both companies are not used in the peer analysis as Piaggio has derives more than half its revenue(53.68%in FY17) from Western Countries while Mahindra and Mahindra Limited derives revenue(roughly 32% in FY18) from farm equipments as well.

Conclusion

In Bajaj Auto Limited, I have seen a leader(Rajiv Bahaj) who has been able to turn around its company and create superior margins over its competitors for the past years. He has also been candid in admitting his mistakes such as having too many variants of Discover which lead to a decrease in the company's market share. The company has prided itself on its R&D(which Rajiv Bahaj started in 1996 with 4 young engineers then) and with its high cash position is primed to carry out more R&D in the near future and explore innovations in its automobile products and processes to drive further value in the bottom line.

However, my concerns would be in its balance sheet where it has a huge amount of investments in mutual funds, bonds and debentures. Should there be a large currency depreciation, the company's asset value would decline sharply and largely affect foreign investors who are invested in it.

Similarly, an increase in credit risk of companies in India which could lead to higher default among companies would affect the company's investments negatively  and impact its operations and valuations.