Three-wheeler biz has long-term risks: Credit Suisse

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Credit Suisse research has recommended neutral rating on Bajaj Auto . TVS Motor launched new products, the most significant being the passenger (pax) three-wheeler variants which will be new competitor for Bajaj Auto. According to research firm three-wheeler business has long-term risks.

Credit Suisse report on Bajaj Auto and TVS Motors three-wheeler business :

TVS Motors launched a slew of new products, the most significant being the passenger (pax) three-wheeler variants. Three-wheelers accounted for 24% of sales and c 38% of Bajaj's EBIDTA in FY07.

TVS has a capacity of 100 k units p.a. The company will start selling pax vehicles in October in South India (c 40% of market) and launch it in rest of India over next few months. The company expects to sell 30 k units in FY09E.

Competition is increasing in the highly profitable pax three-wheeler market, which is dominated by Bajaj (138 k units, c 55% share). While diesel variants from other manufacturers have made in-roads, TVS would be the first competitor with petrol version.

Strong growth in exports (29% p.a. in FY02-07) have helped Bajaj reduce its dependence on domestic pax business (down from 85% of 3-w volume in FY02 to 43% in FY07).

Recovery in domestic two-wheeler business and performance of new model (Exceed) will be critical to short-term performance of the stock. Three-wheeler business has long-term risks. Neutral

Bajaj is well entrenched with three-wheeler operators with a wide portfolio of proven products and well-established service network. However, note that major South Indian cities account for over 40% of pax three-wheeler sales and that TVS is a well-known brand in those markets. Also note that TVS has also launched gas-powered versions of the product, a regulatory requirement in many markets (Delhi being the most significant). While ramp up in sales could be slow (10 k in FY08E, 30 k in FY09E per management guidance), Bajaj's incremental growth in this business could be under risk. However, we do not expect TVS to price the product too aggressively, considering the precarious position of its two-wheeler business. We factor in a volume growth of 5%pa (for domestic pax) for Bajaj in FY07-10E.