Bajaj Auto: Investors must wait for volume recovery before taking exposure

Double digit growth in exports and premiumisation trend in the domestic market are triggers

The Bajaj Auto stock rose 4 per cent after it announced a sharp growth in September dispatches to retailers. Led by the highest ever export volumes, the company posted 20 per cent year-on-year (YoY) growth in two-wheeler wholesale volumes in September.

Though the numbers are not comparable to last year owing to the difference in the festive season period, the Street was nevertheless surprised by the difference between estimates and reported numbers.

Bajaj Auto reported 16-24 per cent YoY growth for domestic and exports of two-wheelers, while Nomura had estimated the same to be in the 7-10 per cent range.

Despite the inauspicious period of Shradh and Adhik Maas from the start of September extending till mid-October, analysts at Motilal Oswal Research have highlighted sustained demand recovery thanks to growing preference for personal vehicles, high disposable incomes in rural markets, and faster recovery in urban markets. While filling up of channels ahead of the festive season could explain the 24 per cent jump in domestic two-wheeler sales, how retail registrations move hereon will indicate the underlying demand.

For August, two-wheeler registrations for Bajaj Auto were 7.2 per cent higher than July, but were still 36.5 per cent lower than the year-ago period. Domestic wholesale figures were up 3 per cent YoY in August.

Analysts highlighted some deferment in sales towards the end of August, on expectations of a cut in goods and services tax. While data for September registration will give a better indication, the Street expects the gap between retail and wholesale to be partially bridged once the festival demand picks pace.  The major trigger for the uptick in the stock, however, is the volume expectation on the exports front.

In their report on Thursday, analysts at Kotak Institutional Equities said Bajaj Auto could record revenue growth at a strong double-digit rate for the next 15 years, led by market share gains in Africa as well as an improving presence in South-East Asia and Latin America, by launching premium motorcycle offerings.

Further, they emphasised on the premiumisation in the motorcycle segment, and the shift to electric scooters (Bajaj e-Chetak) in the domestic market as other triggers that could boost market share for the company. While the long-term growth story seems favourable, investors should await the volume recovery theme to play out before taking an exposure.