Bajaj Auto is sticking to the adage “there is no gain without pain”. The two-wheeler manufacturers’ aggressive pricing strategy to re-gain lost market share is adversely impacting its financial performance. In the December quarter, the company’s profits took a strong beating with EBITDA margins plunging 400 bps to 15.6% (yoy).
At the cost of profit, Bajaj Auto is gaining market share. In the motorcycle segment specifically, its market share had declined from 20% in FY14 to 15.7% in FY18. In a bid to arrest the decline, the management scripted a volume-growth strategy by implementing a sharp cut in prices in the entry-level segment. Consequently, its sales volume has grown by 30.8% over the nine months of FY19, compared to the industry's 12.6%.All this has resulted in a spike in its market share, gaining 260 bps to 18.3% in the motorcycle segment.
While the management is willing to bear the pain, the investors are finding it unbearable. From the peak of ₹3,161 on July 2018, the stock had corrected to ₹2,449 on January 30 this year. However, the stock has bounced back with the help of Bajaj’s promoters going on an acquisition spree. As of March 15, the stock price had recovered to ₹3,000.
Between February 7 and March 14, Bajaj Holdings and Investment bought shares worth ₹10.66 billion, pushing its stake up from 31.55% to 32.81%. Before going on the acquisition spree, the promoters had bought shares worth ₹440 million in February 2017.
The managements’ aggressive pricing strategy has failed to cut ice with investors as well as analysts. “We do not subscribe to BAL’s strategy of chasing growth at the expense of profitability as it will structurally dent its return ratios. We now expect total volumes to grow at a CAGR of 16.4% in FY18-20E to 54.2 lakh units in FY20E (50 lakh units in FY19E & 40 lakh units in FY18),” states ICICI Direct report. Similarly even Emkay isn’t happy with the company's weak operating performance. Analysts at Emkay expect the company’s earnings to increase by an average of 11% over FY19-21.
The foreign portfolio investors are also not buying into Bajaj Auto’s strategy. They have reduced their stake from 17.15% in December 2017 to 16.11% in December 2018. Norway’s Government Pension Fund Global, the largest FPI in Bajaj Auto, has reduced its stake to 1.38% in December 2018 from 1.48% in December 2017. In the same period, mutual funds have flocked to the stock, increasing their holding from 1.96% to 3.57%. SBI Mutual Fund, Tata Mutual Fund and Franklin Templeton Mutual Fund have upped their stake from 0.53%, 0.12% and 0.50% to 0.94%, 0.70% and 0.62%.