With subdued demand on the back of rising oil prices, increase in interest rates, higher compulsory long-term insurance prices, rainfall deficit, and delayed festive season, the share price of Bajaj Auto has witnessed 27 percent correction from its 52-week high that has made the valuation very attractive.
In continuation of our weekly tactical call to guide investors to look at large cap investment opportunities amid market volatility, we have chosen Bajaj Auto as the pick for the week.
With subdued demand on the back of rising oil prices, increase in interest rates, higher compulsory long-term insurance prices, rainfall deficit, and delayed festive season, the share price of Bajaj Auto has witnessed 27 percent correction from its 52-week high. The fall makes the valuation very attractive (14.3 times FY20 projected earnings) for the company with strong fundamentals and quality management.
Factors at play for Bajaj Auto
Improving export markets: The overall export market seems to be stabilising and is expected to benefit Bajaj Auto as it generates more than 40 percent of its revenue from those markets. In Q2 FY19, the company registered a YoY export volume growth of 33 percent. Rupee depreciation is also expected to aid revenue growth from export markets.
The Bajaj Auto management has indicated that they would continue to focus on export and new markets and has guided to selling 2 million units in export market in FY19, up from 1.6 million units sold in FY18.
No permit regime for alternate fuel-run three-wheelers: The overall three-wheeler market continues to gain strength after end of “Raj Permit” in Maharashtra and new permits in Delhi. This has led company to post strong volume growth in the three-wheeler segment. In fact, it registered a strong 32 percent YoY volume growth in Q2 FY19 in the segment.
Further, in a recent announcement by the government to move to no permit regime for three-wheelers run on alternate fuel is expected to augur well for the company, given its 86 percent market share in the space.
In light of strong demand expectations, the company has planned to expand capacity to 1 million units from 0.8 million units.
Domestic motorcycle segment – Focus on market share: The company has started gaining market share across all two-wheeler segments. This is primarily on the back of aggressive pricing strategy adopted by the company. In fact, despite subdued industry demand, the company has registered 19 percent YoY volume growth in Q2 FY19. Bajaj Auto’s management has guided to achieving 20 percent market share in motorcycle segment by the end of this fiscal and has a long-term target of 24 percent.
Operating margin – depreciating rupee to give respite: In Q1 FY19, the company’s EBITDA margin has come off from around 20 percent levels it achieved in last a few quarters owing to negative pricing actions taken by the company in entry-level bike segment. However, the management has indicated that the negative pricing action impacts only 14 percent of the total turnover which could be offset by margin of its premium segment. Further, recent rupee depreciation is expected to provide aid to margins. Rupee has depreciated 5.5 percent in Q2 FY19 as compared to Q1 FY19 average levels and is expected to add 60-90bps in the margin.
Focus on 125cc and above segment: Bajaj Auto continues to focus on 125cc and above segment where customers are willing to pay some premium giving it some pricing power.
Risk factor to monitor: Rising input costs remain a key challenge to monitor that may hurt operating margin. However, rupee depreciation and recent price hikes in all segments except entry segment provide a cushion.For more research articles, visit our Moneycontrol Research page.