Bajaj Auto has been a turn around story and is poised to do well under the helm of Rajiv Bajaj who is quite ambitious and aggressive in his approach and has steered the company well. From a position where all the two wheelers of the company made a loss around five years ago today Bajaj has got an operating profit margin of around 15% which is one of the highest in the automobile industry. The company enjoys a market share of about 30 % and this enables them to have cash reserves to the tune of Rs. 5000 crores.
All of this was made possible because of several reasons. One was the change in mindset of the workers. The new plant set up at Chakan has got around 800 employees whose average age is 24. This was a deliberate step to let go of the baggage that the older generation at Bajaj had.
Another step, which was taken, was vendor development and rationalization. This means that the company substantially reduced the number of vendors it had. This is a modern management practice and the essence of it is that the vendors should be partners in the process. This way the cost comes down because of reduced cycle times and lead times and better management of inventory of the parts that go into a product. More and more parts are also outsourced which enables the company to focus only on the core areas of operation. Since Bajaj accounts for a large part of the revenues of many of these vendors their service levels also improve, as they have to depend on the company for their survival. However the downside is that there is a lot of dependence on these vendors and in case they face a bad time it could mean that the business suffers significantly as compared to the before scenario. With a focus on research and development the company has been able to come up with new products that are hot sellers like the Pulsar. This focus has also enabled them to bring down the warranty costs, which currently stands at Rs. 18 per vehicle. In a scenario where the volumes are quickly growing to the extent of 41% in fiscal 2004, the reduced cost of warranty is quite significant. Otherwise the profitability of the company would suffer and more importantly if the warranty has to be used by consumers the brand would suffer. And referral sales will come down, which would mean that the company would have to spend more on marketing. So although on books they are only saving the amount, which was previously spent on service minus what they are spending now, in reality the effects will be much more.
The road ahead is one, which is paved by ambitious plans of taking the company outside India, and explore the markets of China, ASEAN and Latin America. The worldwide two-wheeler market is estimated to be 50 million vehicles and out of this 90% is accounted for from these regions itself. Bajaj plans to enter these markets through partnering with global players. Partnering a deal with Kawasaki for instance to gain access to the distribution network that it enjoys in the Asean region and partnering with Taiwanese companies to gain access to the Chinese markets. What is very interesting is that in these partnering deals Bajaj would take the products developed by them in house and use the physical infrastructure of the partnered companies in terms of plants and dealerships etc. This shows how confident the company is of its R & D capabilities, which has played a major role in bringing the company back to the current position. What is also in the pipeline is to bring in variants of the current offerings like Pulsar and CT 100. The benefits of bringing about variants are one it stimulates sales and two it segments the market. So that now customers who liked the CT 100 but preferred some other bike because of some feature missing will also go for it. Bajaj also plans to introduce the next generation of scooters, which promise to be more stylish and technologically advanced than what they currently have to offer.
The big opportunity however does remain the international market. If the company can do well in this front the growth will be tremendous and unprecedented. The stock currently hovers around Rs. 1120, which translates into a P/E of 16 times its past year earnings. Considering the growth that the company has shown in the previous fiscal, the strong turnaround based on solid and sustainable long term steps and the ambitious plans of the company the stock is attractive and one could consider buying the counter.
Seeing is believing posted by: Hormazd S. Irani on:Nov 10, 06 2:23 am
When we used to see Bajaj products earlier, we felt that they have a long way to go before they catch up with their Japanese counterparts.
Now the time has come when the design features are so outstanding like in the new range of Pulsar Motorcycles that it would make even the die-hard fans of other manufacturers sit up and take notice. In short they are mind blowing. Yes! they now not only pose a threat to the existing leader i.e. Hero Honda but they may very well occupy their earstwhile position considering the current trend. You have earned your stripes Bajaj. Keep up the good work, concentrate on the quality and you will have it really made. The world had better watch out.
