Strong domestic demand recovery remains vital for Bajaj Auto stock

On the profitability front, favourable raw material costs and better product mix led to a 260 basis points y-o-y jump in operating profit margins to 19.8 per cent

A better- than-expected margin performance in the September quarter, healthy domestic demand, and hopes of a gradual improvement in exports led to a 6.6 per cent uptick in the stock price of two-wheeler major Bajaj Auto.

The Pune-based company was the largest gainer in the BSE100 index. 

On the profitability front, favourable raw material costs and better product mix led to a 260 basis points to year-on-year (Y-o-Y) jump in operating profit margins to 19.8 per cent.

This was the fourth consecutive quarter of the metric remaining above the 19 per cent mark.

The company is looking to sustain margins on the back of a strong product mix and steady raw-material cost trend. 

While a higher share of three-wheelers in the product mix (share at 16 per cent) helped boost margins, this trend is likely to moderate going ahead.

With pent-up demand normalising, the growth in the domestic three-wheeler market is expected to be gradual.

The company’s market share in the diesel segment is 80 per cent, while that in the compressed natural gas (CNG)-based commercial vehicles is 90 per cent.

Outlook for the domestic three-wheeler volumes remains strong on the back of higher demand for CNG vehicles.

Vivek Kumar and Ronak Mehta of JM Financial Research expect margins in the medium-term to draw support from softening raw material costs, favourable mix and higher operating leverage. 

In addition to the margin expansion, the trigger for the stock is the expectation of strong growth in the near term.

In the festival season, while the sector is expected to post a growth of 12-15 per cent, Bajaj Auto expects to outperform peers during this period.

The company is planning to launch six new launches/upgrades over the next six months and bolster its Pulsar franchise to enhance its presence in the premium motorcycle segment.

The company has a 40 per cent share in the 150-200cc segment. 

The Triumph 400 saw a good response and the company is looking at expanding its presence to 100 cities from the current 20.

It also plans to increase its monthly production to 10,000 units from the current output that ranges between 5,000-7,000 units. The company is also looking to expand its presence and production in electric vehicle space (both two and three wheelers) and is eying new launches in Chetak (electric two wheeler) post the festival season. 

While overall growth for the sector is expected to be 5-8 per cent in FY24, how the demand trend pans out post the festival season is a key factor.

Export volumes are two-thirds of the pre-Covid peak, which are expected to recover gradually given the uncertain macroeconomic and geopolitical environment.  

Motilal Oswal Research expects both domestic and export volumes to recover in FY24 from the low base, driving a healthy earnings recovery.

The brokerage expects Bajaj Auto to benefit from market share gains over the long term led by the premiumisation trend, the opportunity in exports and the potential sizeable position in the scooter market via electric vehicles.