Bajaj Auto shares hit by mixed Q2 results, weak festive season outlook

Stock slumps over 13% on weak Q2 results, subdued festive demand outlook

Bajaj Auto shares slipped as much as 13.31 per cent to hit an intraday low of Rs 10,071 per share on Thursday. The decline followed a mixed response from both domestic and international brokerages to Q2 results and a weak start to the festive season. The stock ended the day with losses of 12.87 per cent and closed at Rs 10,122 a share.

The company’s operating profit missed the Street estimates due to a weak product mix in the Indian and global markets on a sequential basis, though the impact was softened by cost control measures. 

The bigger worry for the Street is the muted near-term outlook. Bajaj Auto highlighted that the festive season sales have been weak with volumes registering a growth of 1-2 per cent over the year-ago quarter and expect overall festive season sales to grow by 3-5 per cent. Demand trends in the 100-110cc motorcycle segment have remained weak while the 125 cc segment has witnessed a low single-digit growth. Brokerages were working with low double-digit growth estimates for the sector.

“Festive season has started on a weak note and we see a downside risk to industry growth assumptions if demand trends do not pick up during the festive season,” said Rishi Vora and Praveen Poreddy of Kotak Research.

Margins, according to them, have peaked out and will continue to face pressure, driven by an inferior mix both in export and domestic markets. It has a ‘sell’ rating as most positives are priced in at the current market price.

Analysts at Emkay Research (Emkay) said that the results were slightly disappointing due to lower average selling prices (ASPs). They noted that the company's two-wheeler retail growth has been modest, with a year-to-date increase of 6.7 per cent and a September-October growth rate of just 5.7 per cent. 

Bajaj Auto has been losing market share in the expanding 125cc segment. While exports are recovering, the crucial Nigerian market remains 50 per cent below its peak. On a positive note, the three-wheeler (3W) sector is experiencing growth, which may bolster future performance.

Considering these factors, Emkay downgraded Bajaj Auto to a ‘sell’ rating from ‘reduce,’ setting a new target price of Rs 9,500 based on a multiple of 26 times core earnings for September 26, up from 23 times for June 26. They, however, favour Hero MotoCorp (HMCL) for a better risk-reward profile and TVS Motor Company (TVSL) for its stronger growth prospects.

International brokerage Citi echoed a bearish sentiment, assigning a ‘sell’ rating with a target price of Rs 7,800, citing slightly disappointing Q2 results, driven by a minor shortfall in ASPs and gross margins.  

Analysts at InCred Equities, however, remain cautious due to potential risks to exports stemming from rising tensions in West Asia and global currency fluctuations. Despite a notable 20 per cent stock price rally over the past three months, resulting in a P/E ratio considerably above the 10-year mean, they maintained a ‘hold’ rating, updating their target price for Bajaj Auto to Rs 11,860 based on a target P/E of 30 times for one-year forward earnings.

Conversely, analysts at Nuvama were more optimistic about Bajaj Auto's volume prospects for two-wheelers, projecting an 8 per cent compound annual growth rate (CAGR) from FY24 to FY27, fuelled by 7 per cent growth in the domestic market and 10 per cent in exports.

They highlighted that Bajaj Auto is bolstering its presence in electric and CNG vehicles, expecting these segments to account for over 20 per cent of domestic two-wheelers by FY27. As a result, Nuvama Research raised its FY25–27 operating profit estimates up to 3 per cent and is forecasting a revenue and operating profit growth of 12 per cent and 15 per cent, respectively, over FY24–27, with an average return on equity (RoE) of around 36 per cent. They maintained a ‘buy’ rating with a revised target price of Rs 13,200, up from Rs 12,000.

In addition to Bajaj Auto, shares of its two-wheeler peers, too were under pressure and were down by over 3 per cent due to near-term outlook and profit booking. The BSE Auto index was the worst performer among sectoral indices, slipping as much as 3.56 per cent to an intraday low of 56,731.79 before settling 3.48 per cent lower at 56,781.64. In comparison, BSE Sensex closed 0.61 per cent lower at 81,006.61.