Bajaj Auto: Evaluating the Working Capital Requirements

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Themes: Strategy
Pub Date : 2009
Countries : India
Industry : Financial Management & Corporate Finance

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Case Code : FM0021
Case Length : 13 Pages
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Indian Automobile Industry: An Overview cont..

Despite the economic downturn during 2007-2009, overall production (passenger vehicles, commercial vehicles, two-wheelers and three-wheelers) increased from 10.85 million vehicles in 2007-2008 to 11.17 million vehicles in 2008-2009.⁷ Production of passenger vehicles increased from 1.77 million to 1.83 million while two-wheelers touched 8.41 million from 8.02 million.⁸ According to an analyst at Ernst & Young, passenger vehicle sales in the country will grow at a CAGR of 12% to touch 3.75 million units by 2014 as against 1.89 million units at the end of 2008-2009.⁹ Similarly, as per CARE Research, a credit rating agency, domestic two-wheeler sales will grow at a CAGR of 8.8% by 2014 i.e., 11.3 million.

Two-wheelers, which account for a major share of industry volume has been growing at a CAGR of 9.6%. Until late 1990s, two-wheeler market was dominated by scooters, contributing higher percentage of sales. However, with changing times, with the focus driven on better fuel efficiency and faster mobility, a structural shift towards motorcycle which constitutes 80% of the market.

Within the two-wheeler segment, motorcycles occupy80.6% and their sales account for around 80% of total sales . Cost, ownership and economies of scale are the key purchase criteria of this segment. Though the industry witnessed a slowdown in Financial Year (FY) 2008, it picked up in the subsequent year and grew by 2.6%. Ernst & Young analysts state that, "Though FY09 was a tough year for two-wheelers like it was for other automotive sectors, the variation in growth with respect to the five-year CAGR was the lowest comparatively. Considering the demographics and income levels in the country, the purchase of two-wheelers for regular mobility is very high, thus the domestic potential needs no reaffirmation. We believe that focusing on rural potential will pay dividends for the domestic market and the export volume growth should remain intact."¹⁰ The exports of this segment are moving at a CAGR of 31% in FY2005-2009, crossing the 1 million mark in FY2009

Hero Honda is the market leader with a market share of 42% in Indian two-wheeler segment followed by Bajaj Auto, the second largest with 27% share. There are only few established players in this segment and they pose tough competition to each other.

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7]"Automobiles", http://www.ibef.org/industry/automobiles.aspx, September 2009
8]Ibid.
9]Ibid.
10]"Revving up: Indian automotive industry - a perspective", http://ibef.org/download/Revving_up_Indian_Automotive_perspective.pdf