Per se, nothing was majorly out of place in Bajaj Auto’s Q2 results announced last week. Net sales grew by a healthy 20.6 per cent year on year to ₹12,688 crore and adjusted net profits, 20.7 per cent to ₹2,216 crore. The company continues to do well in the domestic three-wheeler segment. It is also reaping the benefits of focus on executive segment bikes in the ongoing upcycle. And, as in the last few quarters, exports continue to be a bit of a pain point. If one were to look for dampeners, operating margins were a pressure point, coming in at 18.6 per cent in the quarter ended September 2024, after clocking 19. 8 per cent in the same quarter last year as well as hovering just above the 20-per cent mark in the immediately preceding three quarters. And, at a time when two-wheelers are still seeing good offtakes compared with cars which have hit a cyclical slowdown, the management mentioned in the post-Q2 results conference call that the festival season sales were on a slow wicket. Reacting to these developments, the stock fell by a sharp 13 per cent on Thursday, reflecting the extent to which high expectations have been baked into the price.
As such, the Bajaj Auto stock has been on a purple patch. Investors who took exposure to Bajaj Auto based on our ‘buy’ call in early March 2020 as well as our ‘accumulate’ call in January 2022 have reaped rich rewards. The stock is up 268 per cent and 194 per cent since the ‘buy’ and the ‘accumulate’ calls, respectively. The Nifty’s 126 per cent and 41 per cent in the period since these two calls pale in comparison. Taking note of the massive gains and expansion in valuation, we had advised investors to take some profits off the table by tendering the shares in the buyback (at ₹10,000 a share) in March 2024.
Though the stock did see a further run-up since then to touch a one-year high of ₹12,774 towards the end of last month, at ₹10,041 as on Friday’s close, it is now close to the buyback price once again. The stock now trades at around 35 times its trailing 12-month earnings, at a good premium to the five-year historical average of 23 times. Existing shareholders can book profits at this juncture.
Smooth recovery
Two-wheelers were slow to recover in the ongoing upcycle, with sales volumes gaining steam only in FY23, as against passenger vehicles (PVs) sales picking up in FY21/22. As a result, even as PV sales have hit the speed breaker now, two-wheeler volumes are growing in healthy double-digits, at 16.3 per cent year on year for April-September 2024.
Bajaj Auto was always an executive segment player but in the slowdown that ravaged the industry even before the pandemic set in, the company went all out to make a dent in the commuter segment, cutting prices in a bid to gain volumes. By FY20, it had a 17 per cent market share in commuter bikes, from 12.8 per cent in FY18. That effort, which was margin-diluting, thankfully came to an end with commuter segment sales facing pressures from BS IV transition, as well as input and fuel costs going up, among other things. Bajaj Auto has played the recovery in two-wheeler sales in the last two years by going back to what it does best — focussing on higher segment bikes by product differentiation and positioning. In the 110-125cc segment, for instance, its market share has improved from 8 per cent in FY20 to 25 per cent now. Its Pulsar variants straddling segments above 125cc are also enriching the product mix. It has recently launched a sporty 125cc Pulsar as well as NS400Z in the premium segment and upgraded the N250.
Three-wheelers, which fetch higher margins than bikes, have also been a success story for the company during the current upturn. Bajaj Auto has a 72 per cent and a 49 per cent share now in the passenger and goods segments respectively.
EV ride heating up
Bajaj Auto’s EV portfolio brings in 20 per cent of the revenues now and greener vehicles, including CNG and EVs, across two- and three-wheelers, constitute 44 per cent of domestic revenues. On the e-two-wheeler front, the company has three variants of the Chetak now – at ₹1.35 lakh, ₹1.15 lakh and an affordable variant launched this June, ranging between ₹96,000 and ₹1 lakh. The company is working on a new platform for Chetak and a refreshed and upgraded range is being launched beginning mid-November. While Bajaj did find it challenging to make a mark in this segment initially, data from JMK Research shows that Bajaj Auto’s market share in e-two-wheelers has more than doubled from 4.5 per cent in FY23 to about 11 per cent in FY24 and 12.4 per cent in the first half of FY25. Bajaj Auto is now the third largest player in this segment following Ola Electric and TVS Motors. Both electric two- and three-wheelers of the company are eligible for PLI incentives. A ramp-up in Chetak volumes did contribute to the dent in operating margins of the company in the latest quarter, to an extent. While the company has made cost reductions on its Chetak portfolio, right pricing the products will remain key to profitability, even as the company is aiming for market leadership in the EV space.
Export challenges
In its heydays, exports brought more than half the revenues. However, things have not been well on this front in recent times. Export volumes to Bajaj Auto’s key markets such as Africa and South Asia have dwindled due to issues such as inflation impacting demand and the short supply of dollars. According to the management, while the situation is slowly bettering in Asia, Latin American countries which are smaller markets for the company, are seeing decent offtakes. It expects better dollar realisations to support revenues in this segment as of now.
While the Street believed that the domestic side of the business would continue to make up for weakness in exports in the near to medium term, the management commentary that festival season sales has thus far been muted has brought in fears about two-wheeler sales beginning to peak out.
