For Bajaj Auto, share buyback worth up to Rs 2,500 crore spurs optimism

Fall in raw material prices, low base, and normal monsoon are other positives

Two-wheelers major Bajaj Auto announced a share buyback programme worth up to Rs 2,500 crore, offering Rs 4,600 each for 5.435 million shares, aggregating to 1.88 per cent of the company’s equity. The buyback price was at a premium to Friday’s closing of Rs 3,812 and helped push the share price to Rs 3,862 on Monday.

The stock has risen 19 per cent since January, despite unimpressive results through the last fiscal. There’s enough in the kitty for the buyback, with over Rs 17,000 crore of cash on the company’s balance sheet, and given the low sales volumes of the last three years, there’s little need for capacity expansion.

Though two-wheeler sales have remained muted after financial year 2018-19 (FY19), Bajaj reported encouraging performance in Q4FY22. Revenue from operations dipped 7 per cent year-on-year (YoY) to Rs 7,975 crore, but declining sales volumes were offset to some extent by better margins. Quarter-on-quarter (QoQ), the Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin improved 190 basis points (bps) to 17.1 per cent, while adjusted profit after tax (PAT) improved 10 per cent YoY to Rs 1,469 crore.

The auto industry is hard to assess at the moment. Given a low volume base and recent fall in raw material costs, there could be better margins and an uptick in volumes. But tighter liquidity and weak rural demand could continue to impact two-wheelers, in particular. However, there may be excessive pessimism about two-wheelers since there would be a rebound, given a decent monsoon.

The industry has been forced by circumstances to hike prices by 25-35 per cent over the past three years. Apart from high raw material costs, it faced changes in insurance policy norms, and mandated changes in braking systems and upgrades in emissions standards to BS-VI. If raw material costs do decline, given inventory norms, margins would improve with a two-three-quarter lag. Speculators have, however, started taking positions, given the decline in metal prices and hopes that supply chain issues with electronic components and chips would start to ease.

In its last management update in May, the guidance was for strong volume growth driven by rural demand recovery, promising signs from the marriage market, and from students. An electric vehicle (EV) launch, and also the launch of Bajaj-Triumph models priced below Rs 2 lakh were expected this fiscal.

Expectations were that revenues would climb 16 per cent in the FY23 while Ebitda margins would improve by another 100 bps and PAT would rise around 18 per cent. Exports could also be a driver, given the weaker rupee.

The price target assumptions and the price-to-equity valuation assumptions have obviously been affected by the buyback. Before the announcement, most analysts had one-year price targets in the Rs 4,350-4,550 range. The price movement over the next few sessions could be positive and if there’s a generic turnaround in the two-wheeler segment, Bajaj Auto would obviously be a gainer, along with the other major players.