Bajaj Auto rides on richer product mix in Q4, but export and disruption concerns persist

• Bajaj Auto’s shares edged lower by 1% on Wednesday even as the Pune-based manufacturer delivered better-than-expected results in Q4.
• Analysts remain divided on the company’s prospects going forward, due to macroeconomic headwinds, rising competition and disruption.
• Bajaj Auto plans to launch an upgrade to its Chetak electric scooter and first electric three-wheelers.

Bajaj Auto’s shares headed lower on Wednesday even as the Pune-based manufacturer of popular two-wheelers like Pulsar delivered better-than-expected results in Q4. While the company beat analyst expectations thanks to a richer product mix during the quarter, brokerages point out that uncertainty on exports and concerns of disruption still persist.

Bajaj Auto’s shares edged lower on on Wednesday, down by 1%. The company reported a 2% YoY decline in its standalone net profit to ₹1,433 crore. Two-wheeler sales, which constituted nearly 88% of the company’s total volumes, were down by over 10% during FY23, largely due to shrinking exports.

Brokerages are divided on the stock despite its strong operating performance. “Post the recent rally, we believe most of the positives are already being factored in at the current market price,” said the analysts at Kotak Institutional Equities.

Bajaj Auto’s shares rose 13% in the last one month and over 20% in 2023 so far, outperforming the broader Nifty Auto index which has gained nearly 8% and 2%, respectively.

An average of brokerage estimates suggests that there is an upside of a little over 3% over the next 12 months, with an average target price of ₹4,443, as compared to the current market price of ₹4,306 per share.

Exports to recover in FY24, but that will shrink margins

Declining exports have been a major pain point for Bajaj Auto in FY23. The share of exports in its total volumes declined to 46% in FY23 from 58% in FY22. This was in large part due to demonetization in Nigeria, which is Bajaj Auto’s key market. Demonetization led to limited availability of US dollars and in conjunction with inflation, it limited exports.

Management commentary in Q4 underlined that the exports have bottomed out and a recovery is expected in FY24, but brokerages say that this is contingent upon the availability of US dollar improving.

A downside of exports recovering is a decline in margins owing to the lower average selling price of vehicles in Africa.

“We do not expect the current profitability to sustain as we expect demand from African geography (lower average selling prices) to recover from the second half of FY24 onwards,” the Kotak report added.

Ripe for disruption from electrification

A richer product mix aided Bajaj Auto’s margins in the March quarter – its operating margins rose 220 basis points YoY to 19.3%. However, analysts underscore a key emerging concern – disruption from electrification.

“A large part of its India profit pool of premium motorcycles and three-wheelers is vulnerable to possible disruption from electrification,” said the analysts at Motilal Oswal.

Bajaj Auto sold over 5,500 units of its Chetak electric scooter in March 2023 while its peers — Ather, TVS and Ola Electric sold between 12,000, 15,000 and 21,000 electric scooters, respectively.

The company plans to catch up by ramping up its manufacturing capacity to 10,000 units from June this year, but even at those levels, its peers are still ahead. The company also said that an upgrade to its Chetak electric scooter is in the works.

Three-wheelers, which accounted for nearly 12% of the company’s total volumes, is another segment where Bajaj Auto is lagging behind its rivals Mahindra and Kinetic, among others, who already have their vehicles on sale. Bajaj Auto said it will launch its own electric three-wheelers in the coming days.

Analysts divided, upside limited

Analysts are divided on the company’s prospects going forward. Bajaj Auto is guarding its margins with price hikes and a better product mix. But, headwinds like elevated commodity costs could limit its scope.

“At current valuation, most positives are priced in, leaving limited upside,” said the analysts at Reliance Securities, downgrading the company from ‘buy’ to ‘hold’.

All in all, Bajaj Auto has a few challenges on hand which includes heightened competition in the budget two-wheeler segment, disruption concerns in the high-margin premium motorcycles and three-wheeler segments, and uncertainty in its export markets.


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