Moneycontrol Pro Panorama | Bajaj Auto's harsh reality check stuns investors

Bajaj Auto delivered healthy earnings growth in the September quarter.

Dear Reader,

Quarterly results can be a great leveller of investor expectations. Consider the automobile sector. Investors have driven up the Nifty Auto index despite a steady slowdown in production and wholesale despatches in the first nine months of 2024 calendar year. Retail sales and vehicle registrations had indicated decelerating trends across automobile segments in September.

Yet, investors pinned hopes on the festive season. Two-wheelers, which have seen a decent growth in wholesale despatches, are expected to lead earnings in Q2 FY25. Bajaj Auto delivered healthy earnings growth in the September quarter. However, the company dashed hopes of a strong festive season, triggering a selloff in the stock and in shares of other automobile companies.

In a post-result earnings call, Bajaj Auto’s management said the festive season began on a muted note with sales lagging expectations. Sales are now projected to rise by 3-5 percent in the overall festive season. For the full fiscal FY25, the domestic two-wheeler industry growth is pegged at 5 percent. Before Bajaj Auto’s results, analysts were expecting a double-digit growth or at least 10 percent expansion in two-wheeler industry sales in FY25.

Bajaj Auto’s growth projections are out of sync with the rally in the stock so far in 2024 and valuations. “With a valuation at 31.9 times FY25 projected earnings, it appears expensive,” write Nitin Agrawal and Neha Gupta from the MC Pro Research Team in Bajaj Auto’s results review note.

Of course, results of other automobile companies can vary. Still, the commentary from Bajaj Auto indicates weak demand trends on ground. Two-wheelers are largely mass-market products. The weak offtake so far this season runs against optimistic investor expectations built around healthy monsoon rains and recovery in rural demand.

A muted festive season can have a material impact on the earnings of automobile companies in other segments. Registrations and retail sales of passenger and commercial vehicles declined for two consecutive months in September 2024. If sales in the festive season do not pick up, then the Street's expectation of mid-single digit growth (4-5 percent) for the passenger vehicle industry will have to be revised downwards.

The soft demand commentary can also have ramifications for companies in other consumer goods sectors. Weak automobile sales mean consumers are putting a tight leash on discretionary spends.

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