Suno Sabki, Karo Apni – How I made …

Broad negative opinion about a particular asset can make it the least risky thing, since all the optimism gets driven out of its price.

This statement by Howard Marks (‘HM’) of Oaktree Capital enabled me to make 25%+ return in Bajaj Auto (‘BA’) over the last 3 months. Well, yes, HM’s statements are always profound, and if followed and executed well, they enable to make money!! The problem is “following and execution” – often is extremely difficult and I have myself erred many a times.

But, lets come back to the Bajaj Auto example. The overall auto sector has been laced with negative sentiment since quite some time now. Bet it general economic slowdown, job losses in larger cities, rural distress, high GST rates, obscene insurance costs in the auto space, negative demand for discretionary goods like 2-wheeler/4-wheelers, deferment in purchases, emergence of Electronic Vehicles (‘EVs’), regulatory challenges on account of BS VI compliance, large scale job losses, etc. – Negativism galore. The negative sentiments resulted in the Bajaj Auto’s stock price cracking from INR 3,000 per share to around INR 2,500 per share during end of July 2019.

Amongst the above, adoption of EVs and the existing combustion engines coming to a grinding halt made the most noise. Now, I don’t understand much of technology (can email, switch on and switch off computers though!! – that’s my circle of competence), however call to a dear friend who has been in the auto industry since some time and who understands the digital and the tech side of things well provided some meaningful insights. His take was that EV adoption was at least 10 years away for India and at max 5% of the market could get disrupted in 5 years from now.

Drawing some comfort, I had 3 basic questions to answer:

1. If not, Bajaj Auto which could disrupt, who else? Yes, obviously, there are other players too.
2. Even if Bajaj Auto were late to the party, it would be able to catch up with the who moves first, considering that it spends a large chunk of its revenue on R&D – BA spent approximately INR 456 crs in FY 2019.       
3. Considering BA’s strong fundamentals, it can easily absorb/acquire/enter a JV with an EV player. At the end of the day, the EV player would not have the distribution network like BA. Distribution networks are difficult to build and time consuming thereby giving BA an edge against any other EV player.

Not to forget, Quality of BA’s management is profound. Commentary from Mr. Rahul Bajaj, the Chairman of the company captured in Bajaj Auto: Pearls of Wisdom – Chairman’s Letters is very succinct and transparently describes the management’s follies and triumphs over the years.

At INR 2,500 per share in July end 2019, the stock became available at a trailing PE of 14.6x, thereby making it least risky from a valuation stand-point. Having answered the above questions to my satisfaction, I invested in the company.

Fast forward now (25^th October 2019), the stock is priced at INR 3,131 per share, resulting in 25%+ return.

Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.