industry analysis ppt
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bajaj auto analysis pptTRANSCRIPT
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• Industry Analysis• Strategic Analysis• Financial Analysis• Recommendation
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INDUSTRY ANALYSIS TWO WHEELERS
Tool Used: Porter’s Five Forces Model
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Competitive Force 1: Rivalry Among Existing Firms
Industry Growth Rate
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Competitive Force 1: Rivalry Among Existing Firms
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Industry Growth Rate 41 31 15 21 19 14 -8 4 24 11 14 13
GDP Growth Rate 5.8 3.8 8.5 7.5 9.5 9.7 9 6.7 9 7.5 7.8 7
-20-10
01020304050
Gro
wth
Rat
e
Growth Rate
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Competitive Force 1: Rivalry Among Existing Firms
The Two wheeler industry as can be seen in the above graph has shown a strong co relation to the GDP growth and thus based on the above co relation; the industry growth is pegged as following
2011 11%
2012 14%
2013 13%
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Two Wheeler Industry – Number of companies and relative size
Company Name Company Size (top Line) %age Size (In terms of Revenue)
Hero Honda Limited 117,089 100
Bajaj Auto 85,215 72.77
TVS Motor Company 32,080 27.39
HMSI 24.6
Yamaha 4.66
Suzuki 4.08
Competitive Force 1: Rivalry Among Existing Firms
Concentration and Balance of Competitors
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Competitive Force 1: Rivalry Among Existing Firms
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Competitive Force 1: Rivalry Among Existing Firms
Degree of Differentiation
The data for market share in different segments namelyExecutive, Economy and Premium , as also Scooters shows us the following
Hero Honda is the leader in Executive segmentBajaj is the market leader in Economy and Premium segmentsTVS and HMSI have major share in the scooter market
This shows that every major firm in the industry has its own space of competition and thereby specific points of differentiation in terms of segments
Also, being technology focused, the players have technology differentiated from each other and thus have a differentiation in product termsEG: DTSI, RTR etc
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Competitive Force 1: Rivalry Among Existing Firms
Switching Costs
Factors resulting into high switching costs
Highly Differentiated products High Price of Product High Depreciation
Intangible costs in terms of efforts like registration of the vehicle, insurance etc
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Competitive Force 1: Rivalry Among Existing Firms
Ratio of Fixed to Variable CostsRatio of Fixed to Variable Costs
Industry Cost Structure
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Competitive Force 1: Rivalry Among Existing Firms
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Competitive Force 1: Rivalry Among Existing Firms
Current Capacity Utilization for industry is 75%Current Capacity Utilization for industry is 75%
Hero Honda, BAL and TVS have a utilization of 88%, 69% and 67% respectivelyHero Honda, BAL and TVS have a utilization of 88%, 69% and 67% respectively
Smaller players like HMSI and Yamaha have a utilization of more than 80%Smaller players like HMSI and Yamaha have a utilization of more than 80%
High Exit Barriers, however since the demand situation is good, the incentive to cut prices and fill capacity is reducedHigh Exit Barriers, however since the demand situation is good, the incentive to cut prices and fill capacity is reduced
• Current Capacity Utilization for industry is 75%• Current Capacity Utilization for industry is 75%
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Competitive Force 2: Threat of New Entrants
Two possible levels at which new entrants might enter the Two wheeler industry are
High End Bikes:Companies like Ducati, BMW, Triumph etcThese bikes would be more than 250 cc Business model is different with parts being imported and assembled in IndiaThis segment is not likely to command a great share in the market and hence cannot challenge the leadership of existing companies
High End Bikes:Companies like Ducati, BMW, Triumph etcThese bikes would be more than 250 cc Business model is different with parts being imported and assembled in IndiaThis segment is not likely to command a great share in the market and hence cannot challenge the leadership of existing companies
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Competitive Force 2: Threat of New Entrants
New Companies entering in the competitive segments:These entrants would face the following problems
Economies of ScaleThe existing market leaders have achieved high economies of scale and utilization
A new entrant would have to enter with high capacity and less utilization or less capacity to start with
Distribution Channel Leverage
Company Dealers Service Centres
Hero Honda 550 3500
BAL 485 1600
TVS 604 2500
Honda 285 709
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Competitive Force 2: Threat of New Entrants
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Competitive Force 3: Threat of Substitutes
The substitution in this case could be an upward substitution
The following are the advantages that a two wheeler provides over an upward substitute
In the above context, only one recent product development namely Tata Nano, was close to becoming a substitute, however it provided only a low initial investment option for a Four wheeler but the maintenance and the operational cost is still a deterrence, thus an upward substitute seems unlikely in the near future
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Competitive Force 4: Bargaining Power of the Buyers
Price Sensitivity
Price Sensitivity determines the extent to which buyers bargain for a lower price
Conventionally, Indian Consumer has always been price sensitive and expects more value for every marginal increase in price
However, the following factors determine price sensitivity
Price Sensitivity determines the extent to which buyers bargain for a lower price
Conventionally, Indian Consumer has always been price sensitive and expects more value for every marginal increase in price
However, the following factors determine price sensitivity
The extent of Differentiation
Product category and investment amount
Limited players and hence a price premium commanded by each player
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Competitive Force 4: Bargaining Power of the Buyers
Relative Bargaining Power
The relative bargaining power is the degree to which buyers are able to lower the price by bargaining
This depends on the followingNumber of BuyersNumber of Suppliers
In the two wheeler industry, the number of companies is 9 and major players only being 5
On the other hand, the there were 8 million motor cycles sold last year thus suggesting high number of buyers
Hence, the relative bargaining power of buyers is very low
The relative bargaining power is the degree to which buyers are able to lower the price by bargaining
This depends on the followingNumber of BuyersNumber of Suppliers
In the two wheeler industry, the number of companies is 9 and major players only being 5
On the other hand, the there were 8 million motor cycles sold last year thus suggesting high number of buyers
Hence, the relative bargaining power of buyers is very low
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Competitive Force 5: Bargaining Power of the Suppliers
Price Sensitivity
Steel, non ferrous materials and fibre plastics for major raw material costs for two wheelers
Steel forms 55% of the cost, aluminium forms 30% of the bike
Price Sensitivity here depends on the extent to which the buyers (in this case two wheeler companies bargain for a lower price)
This depends on the cost structure of the industry
Raw Material costs form 73% of the total costs which is a huge component
Due to this, the two wheeler companies are extremely price sensitive
Steel, non ferrous materials and fibre plastics for major raw material costs for two wheelers
Steel forms 55% of the cost, aluminium forms 30% of the bike
Price Sensitivity here depends on the extent to which the buyers (in this case two wheeler companies bargain for a lower price)
This depends on the cost structure of the industry
Raw Material costs form 73% of the total costs which is a huge component
Due to this, the two wheeler companies are extremely price sensitive
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Competitive Force 5: Bargaining Power of the Suppliers
Relative Bargaining Power of Suppliers
The relative bargaining power of steel and aluminium suppliers is high due to the fact that these commodities find extremely varied sources of application and thus high number of buyers
Also, the number of steel manufacturers is less compared to the number and volume of buyers
Thus the two wheeler industry resorts to cost cutting measures like value engineering and shifting to excise free zones
Also, the cost of the raw materials peaked in 2008-09 however it has seen a decline in this fiscal
Thus, the cost of raw material is expected to be 70% next year in the overall cost structure
The relative bargaining power of steel and aluminium suppliers is high due to the fact that these commodities find extremely varied sources of application and thus high number of buyers
Also, the number of steel manufacturers is less compared to the number and volume of buyers
Thus the two wheeler industry resorts to cost cutting measures like value engineering and shifting to excise free zones
Also, the cost of the raw materials peaked in 2008-09 however it has seen a decline in this fiscal
Thus, the cost of raw material is expected to be 70% next year in the overall cost structure
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Competitive Force 5: Bargaining Power of the Suppliers
Extent of Vertical Integration
Vertical integration is a very distant possibility in this case due to the kind of raw materials involved Vertical integration is a very distant possibility in this case due to the kind of raw materials involved
Inferences
The two wheeler industry is a lucrative industry for investing and the only major threat to the industry comes from the cost of raw materials(Steel, Aluminium) which if increases might severely effect the bottom lines of the players
The two wheeler industry is a lucrative industry for investing and the only major threat to the industry comes from the cost of raw materials(Steel, Aluminium) which if increases might severely effect the bottom lines of the players
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STRATEGIC ANALYSIS
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The Bajaj Structure
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BRAND STRATEGY
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International Business
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The One-Two StrategyDomestic International
Attack
New Product Lines (PL)
Develop each PL as a brand
(Removal of Bajaj branding)
Manufacturing the ULC as a
competitor to Tata Nano
Technological innovations
Concentrate on low-income
economies like Africa and Latin
America with low-cost
carriers/bikes, with norms similar to
BS-III
China as a hub into Far East
Acquisition of stake in KTM
Defend
Concentration on sales-driving
products such as bikes; stopped
production of scooters
BS-III compliance for CV segments
More variants across existing PLs.
Strengthening existing service
network in international markets
Tie up with other partners to prevent
cannibalization of sales
India as hub for western exports
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Other factors
• Chakan Plant
– Site for ULC production
– Highly-automated plant
– Labor unrest a cause for concern
• Hero Honda splitting?
– More vulnerable
– Technological capabilities might
make the difference
• Succession Plan
– Rajiv Bajaj already CEO
– Preempt threat from
Sanjiv/Shishir
– Long-term focus and leadership
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FINANCIAL ANALYSIS
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FINANCIAL ANALYSIS
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Cash Flow Analysis
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Operating Activity:
•The substantial increase in cash flow from operating activity was mainly due to increase in sales by 33.41%. •Cash generated from sales increased from 943 Crores to 3455 crores.
Financing Activity:
•The company had paid off the short term borrowing of 250 crores and paid dividend of around 350 crores.•Had not raised any fund last year.•Raised 72 crores long term fund this year and was given AAA rating by CRISIL.
Investing Activity:
•Company have been constantly making investment in its subsidiary companies around 80 crores. •This year company have made investment of around 2111 crores, which majorly consist of central and state government bonds.
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Comparision Analysis:Sales
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Net Profit Margin
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Interest Expenses
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DEBT- EQUITY RATIO
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EPS
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Ratio AnalysisProfitability Ratio
Profitability Ratio Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10
Operating Profit Margin 16.89 14.11 12.29 12.55 21.05
Net profit margin 13.86 12.66 8.32 7.4 14.23
Interest Coverage Ratio 4280.03 280.28 224.91 53.63 418.34
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Profitability Ratio Ctd.
Profitability Ratio Mar'
06
Mar'
07
Mar'
08
Mar'
09
Mar' 10
ROCE 23.32 20.9 39.71 32.75 58.63
RONW 23.09 22.36 47.61 38.92 58.14
ROTA 11.05 546.96 109.73 116.56 202.4
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Per Share RatioPer Share Ratios Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10
EPS 108.87 122.35 52.25 45.37 117.69
Book value per share 471.49 546.96 109.73 129.23 202.4
Dividend per share 40 40 20 22 40
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Liquidity & Solvency Ratio
Liquidity & Solvency Ratio Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10
Current Ratio 0.79 0.84 0.88 0.84 0.69
Quick Ratio 0.69 0.76 0.64 0.73 0.55
Debt Equity Ratio 0.31 0.29 0.84 0.84 0.46
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Management Efficiency Ratio
Management Efficiency Ratio Mar' 06 Mar' 07 Mar' 08 Mar' 09 Mar' 10
Fixed asset turnover ratio 2.62 2.96 2.95 2.6 3.5
Inventory turnover ratio 34.14 36.88 29.33 28.64 28.87
debtors turnover ratio 22.00 22.66 21.93 27.45 37.41
number of days in working capital -37.82 -25.57 -9.73 -8.31 -41.29
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Du- Pont AnalysisBottom of Form 8-Mar 9-Mar 10-Mar
PBIDT/Sales(%) 13.55 12.2 21.04
Sales/Net Assets 3.33 2.78 2.84
PBDIT/Net Assets 0.45 0.34 0.6
PAT/PBIDT(%) 57.56 59.28 66.77
Net Assets/Net Worth 1.83 1.74 1.46
ROE(%) 47.61 44.5 70.98
• the main reason of increase in profit margin is due to increase in sales by 33.49%, thus utilizing capacity near to optimum level.
• The industry profit margin was around 16.5%
• There has not been any addition to fix asset in last year.
• While closing inventories have increased around 10 times from 107 cr to 1073 cr.
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VALUATION
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• From the above analysis, we can see that the growth in sales of BAL in 2010 is 33.4 % compared to 2009 with CAGR of 12% and that in PAT is 11.50% (CAGR growth in PAT is %).
• For Next Year, we can expect a growth in PAT of:
• 10% (Pessimistic)• 12% (Most likely)• 15% (Optimistic)
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Data as on 2nd September, 2010. • EPS (TTM) = Rs. 138.01
• P/E Multiple = 20.17
• Industry P/E = 18.89
• Price of the stock = Rs. 2778 (BSE), Rs. 2776 (NSE); (time: 15:31, IST)
• 52 week high= Rs. 2887 (highest on 2nd Sep) and low = Rs.1255
(source: www.moneycontrol.com)
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• Average EPS = 123.67 • Average P/E multiple = 17.15 • P/E Multiple has increased as compared to last year. We can
expect PE to be:• 17.15• 20• 21• 22
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Sensitivity AnalysisOur analysis is based on the assumption that EPS has increased in proportion to CAGR of PAT.
Growth (%) 10 11.5 12.75 (
current EPS level)
15
EPS (Rs.) 107.54 129.04 138.01 161.3
Expected Price of the share:
EPS 107.54 129.04 138.01 161.3
P/E Multiple
17.15 1844.31 2213.04 2366.87 2761.67
20 2150.80 2580.8 2760.21 3220.6
21 2258.34 2709.84 2898.21 3381.63
22 2365.88 2838.88 3036.22 3542.66
Beta or volatility of the stock is 0.6423 with respect to NSE Nifty and 0.6379 with respect to BSE Sensex.
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Recommendation
• For the existing shareholder we recommend them to HOLD the shares with target Price of Rs. 2800 to 2850.
• And for the new investors to BUY the stock for the short term gain as BAL has expected 14-15% growth in PAT during Quarter 2 ending Sep, 2010 with current P/ E level.
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Some of the analysts’ comment/suggestions:
• To stay on with the stock, it because over a longer period of time, the market outperforming performance of Bajaj Auto is likely to sustain for at least in the next 6 quarters, says Technical Analyst, Vijay Bhawani.
• Emkay Global Financial Services has recommended accumulate rating on Bajaj Auto with a target of Rs 2865 in its July 23, 2010 research report.
Upgrade FY11E EPS by 15.7% to Rs 167.5 and FY12E EPS by 13.4% to Rs 190.9. Upgrade target price to Rs 2865 (up by 13.4%) valuing at 15x PER FY12 earnings. Maintain accumulate rating,” says Emkay Global Financial Services research report.
source: www.moneycontrol.com