Bajaj Auto: Cruising well despite odds

In contrast, the company recorded a YoY growth of 163.41 percent in the three-wheeler (3W) segment. Growth was driven by the normalisation of the economy, post the pandemic.

In the export market, the company faced demand constraints due to the challenging macroeconomic situation in a few markets. It saw a decline of 4.31 percent in the 2W segment and a 47.82 percent in the 3W segment.

Despite an overall YoY decline of 7.19 percent in volumes, Bajaj Auto’s net revenue outperformed and posted a growth of 8.28 percent. What supported the top line was the 16.8 percent YoY growth in realisation, which came on the back of a price hike, undertaken to pass on the raw material price inflation, and a rich product mix.

Despite the negative operating leverage and the significant rise in raw material prices, the EBITDA margin, expanded by 101.2 basis points (bps) on a YoY basis. The expansion was driven by a rich product mix, price hikes, and better currency realisation.

Outlook

Domestic industry expected to pick up The two-wheeler industry continues to face multiple headwinds by way of a subdued demand environment, and supply-chain disruptions due to the shortage of semiconductor chips. However, the management has indicated that the supply-side constraints seem to be easing as new sources have been developed.

It also indicated that economic hardship, post the pandemic, and the significant price rise, due to the safety norms and the pass-through of raw material cost, have dampened demand sentiments.

However, it is optimistic about a pick-up in the long-term demand on the back of the government’s focus on rural areas. A normal monsoon and robust crop production are expected to aid demand. Moreover, the opening up of schools/colleges and offices is expected to boost demand.

The management expects the 3W segment to do well, with the opening up of the broader economy and free movement of people across the country. It also highlighted that the order book continues to be very strong.

Export markets remain steady The momentum in international markets continues though production is being impacted by the chip shortage.

The company has also highlighted that market share in all the geographies remained steady despite taking price hikes. Further, the company has a higher proportion of premium bike sales in the export market. This should augur well for its financials.

KTM and Dominar exports continue to remain strong. The company has also achieved record sales in Latin America and became one of the leaders in the segment.

However, some countries are facing macroeconomic challenges, which may have a short-term impact on volumes.

New products to be key growth drivers Bajaj Auto feels the next leg of growth will come from the new variants of existing products or fresh offerings. The company plans to roll out many new models or upgrades in FY23. Bajaj Auto introduced the Pulsar N160, which is expected to become the  benchmark for performance and control in the entry-sport segment.

Further, refreshed versions of Dominar 400 are expected to be launched in Q2. The roll-out of the new versions will help the company to expand its market share.

In the electric vehicle (EV) segment, the company has commissioned a new state-of-the-art plant this June, which will help the company to capitalise on the opportunities that EVs offer. Product trials have started and soon commercial EV production will start.

Supply-side constraints and cost inflation are easing Like any other automobile company, Bajaj Auto is facing production issues because of  the shortage of semiconductor chips. However, unlike in the car-manufacturing industry, where the chip shortage impacts all products, only premium products are hit in the 2W space. Hence, only 20 percent of Bajaj Auto’s portfolio is hit by the shortage. The management says the constraints are easing as new supply sources have been developed. It is confident to bring inventories back to the normal level in Q2 FY23.

Another challenge is the significant rise in raw material prices, though the management indicated that it had passed on all cost inflation through price hikes. It, however, observed that prices have started correcting, especially of the metal pack, which will help the company to expand its margin.

Reasonable valuation Bajaj Auto is trading at a reasonable valuation of 18.5 times its FY24 projected earnings. We advise investors to buy this stock with a long-term perspective.

Risks Any weakness in demand and a longer recovery period could hurt financials. Moreover, adverse commodity price movements would increase raw material costs and hurt operating profitability.

For more research articles, visit our Moneycontrol Research Page.