Bajaj Auto Q2 Preview: Domestic sales to lead volume growth, exports may be a drag

But domestic 2W sales volumes (in units) is expected to see a significant rise of 98 percent QoQ for Bajaj Auto, because chip-shortage has eased and inventory build-up has been good for the festive season, according to Kotak Institutional Equities report released on October 6. The brokerage has a reduce call on the stock. This--along with a 35-71 percent QoQ rise in domestic and export volumes in three wheelers (3Ws)--has led to overall volumes going up by 23 percent QoQ, added the analysts. But the overall volume growth was offset by a decline in export volumes of 2W, and the decline in these export numbers were because of a slowdown in demand in the African market, added the analysts.

Devaluation of local currency in Nigeria and talk of a ban in the country were expected to hit Bajaj Auto hard.

Analysts at KIE expect revenue to grow 20.3 percent QoQ to Rs 9,632 crore from Rs 8,005 crore last quarter and 9.9 percent YoY from Rs 8,762 crore a year ago.

Analysts at Axis Securities too estimate revenue growth to be around that range, with 21.2 percent QoQ growth to Rs 9,702 crore and 10.7 percent year-on-year (YoY) growth. In an October 11 report, the analyst wrote, “We expect revenues to increase 21 percent QoQ led by higher sales volume (up 23 percent QoQ) led by higher domestic sales on the back of higher dispatches for festive demand (up 98 percent QoQ) partially offset QoQ. Revenue growth is partially offset by our lower assumption for ASP (down 1 percent QoQ) led by lower export realizations”.

They expect EBITDA to grow 21.5 percent QoQ to Rs 1,576 crore from Rs 1,297 crore a quarter ago, and 12.5 percent YoY from Rs 1,401 a year ago. But they estimate that the operating margin will remain unchanged quarter on quarter at 16.2 percent, because of lower exports and domestic sales dominated by lower-end products. They expect these two factors to weigh on higher operating leverage.

KIE analysts expect EBITDA to grow 20.4 percent QoQ to Rs 1,561 crore, and 11.4 percent YoY.

Tough road in Africa

In the first quarter earnings call, the management had spoken about the challenges they were facing in the Nigeria market with devaluation of the local currency Naira, which caused retail prices to shoot up 2-3x over 16 quarters. But the management expected the demand to return because, as the company’s Executive Director Rakesh Sharma said, the “the industry is so big and so deep and so fundamental to Nigeria and… to other countries in Africa”.

“Now over the last 15 years, which we have been in operation, we have seen that when this happens, there are 2, 3 months when things go topsy-turvy. And after that, the equilibrium returns. Even if it settles down at a higher level than it did, it gets digested and demand sort of comes back,
he added.

The other challenge of faced in the country the ban on two-wheelers, after there were reports that they were being used by terrorists. This was expected to hit Bajaj Auto because it has a large market in motorcycle taxis that ply in the country. But, in the last earnings call, Sharma talked about it as a temporary hitch. He said that an outright ban would be a challenge to whoever tries to enforce it because there are millions dependent on the motorcycle taxis for their living and for transport. Even if there are restrictions, he added, they will be largely for the government to make a point and once that is made the company expected normalcy to return.

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“We have faced bans in Iraq. We have faced bans in Sri Lanka, in Philippines and Afghanistan, in Egypt, in Argentina and Nigeria also previously, 250cc is getting banned in Philippines. So these things come and these things go,” he said in Q1 earnings call.