Bajaj Auto riding on robust volumes

Margins likely to improve on higher share of 3-wheelers, premium bikes

After underperforming vis-à-vis its peers for the first eight months of the year, Bajaj Auto made strong gains since the start of September, gaining 17 per cent since then.

Brokerages have upgraded the stock on the back of improving exports, rising three-wheeler sales and a richer product mix. The near-term trigger for the stock would be a strong performance in November. Led by a 94 per cent jump in three-wheeler sales, the company reported year-on-year overall sales growth of 21 per cent. Though sales were robust, driven by a low base, strong exports and opening up of three-wheeler permits, they were below estimates, as most analysts had pegged growth at 29-30 per cent. The stock shed three per cent on Friday.

One of the key triggers is an uptick in three-wheeler sales. This is led by regulatory changes in various markets. In Maharashtra, for instance, the state government has removed the cap on the number of three-wheeler permits. If other states follow suit, it would open up a large market for the company, as it has 90 per cent share in the key passenger three-wheeler markets. 

Overall, the company estimates an incremental opportunity of 142,000 three-wheelers in the next two-three years in Maharashtra, Delhi and Karnataka. It has also gained market share in the goods three-wheeler segment, which the firm entered into in the March quarter of FY16, with the current pie at 17 per cent.

Another trigger is exports, which account for 45 per cent of the company’s volumes. It is the strong show of exports that has helped the company offset weaknesses in the domestic market. Year-to-date volumes are up a per cent largely on account of 11 per cent growth in exports, even as domestic sales are still six per cent lower. The weakness in key markets such as Nigeria and Egypt had led to a fall in exports over the last three fiscal years. 

Things have improved as some of the oil-dependent economies have started to turn around, while the company has been looking at newer markets to reduce its geographic risk.

With a larger share of its portfolio in the premium segment and higher share of three-wheelers, analysts expect the margins to improve. While higher realisations and volumes have helped to improve margins in the September quarter to 19.7 per cent, analysts expect the number to improve to about 22 per cent next year, as its premium segment launches, such as the Pulsar 160 NS, gain traction.

What could spoil the show is the rising raw material cost that would be difficult to pass on, given stiff competition. 

Muted domestic two-wheeler sales, which grew two per cent in November, are a concern area.