Weak exports remain an overhang in the near term for Bajaj Auto

Strong realisations helped the company beat estimates in Q3

Bajaj Auto’s operating performance for the December quarter of the 2022-23 financial year (Q3FY23) comfortably beat Street expectations. The largest listed two-wheeler maker by market capitalisation posted a 29 per cent increase in operating profit to Rs 1,777 crore, its highest till date, led by higher margins and an improved topline show.

Higher realisations was one of the key drivers of the company’s performance, even as volume trajectory remained muted -- especially on the exports front. Thus, while overall volumes were down 17 per cent year-on-year (YoY), the revenue growth of 3 per cent was largely due to a 24 per cent jump in per unit realisations to record levels of Rs 94,736.

Operating profit margins came in at 19.1 per cent, up 387 basis points (bps) YoY. The metric crossed the 19 per cent mark after a gap of eight quarters, points out SMIFS Research. The gains were aided by softer commodity costs and better product and geographic mix, says the brokerage.

On the product front, the company had highlighted that domestic two- wheeler sales, particularly in the top end commuter/sports segment were buoyant and the company outperformed with strong growth in the segment.

Volumes of bikes with capacity exceeding 125 cc grew at 25 per cent YoY, helping the company gain market share of 2 per cent in Q3FY23. This segment now accounts for two thirds of its sales as compared to 46 per cent in FY20. New launches -- such as the Pulsar150 in November -- have helped push up sales, thus boosting its market share.

Sales of the higher margin three-wheeler segment were up 71 per cent YoY and 22 per cent sequentially. The company indicated that sales in the commercial vehicle segment maintained their path of recovery to pre-Covid-19 levels. In addition to volume push from cyclical recovery of the segment, increased proportion of three-wheeler sales and launch of electric three-wheelers are other triggers to watch out for going ahead.

Exports have been the weak spot across the two-wheeler and three- wheeler segments, and posted a 33 per cent YoY decline in the quarter. While exports to the ASEAN market are growing, volumes in key markets of Africa, Latin America and south Asia were hit on account of economic weakness, unfavourable currency movements and dollar availability issues. Export performance in the near term could be weak with recovery expected in the June quarter though some brokerages believe that they have bottomed out.

Say Mitul Shah and Sheryl Fernandes of Reliance Securities, “On the export front, we have seen subdued performance over the last 2-3 quarters due to inflation and currency devaluation in key markets, but it has stabilised now. Exports have bottomed out and it would improve sequentially Q4FY23 onwards after rationalising of channel inventory in the company's key export markets.”

The brokerage has a ‘buy’ rating as, in addition to operational factors (domestic market, 3W recovery and sequential export gains), improving return ratios, strong balance sheet and attractive valuations are its key investment arguments. Its target price is Rs 4,400 a share.

Emkay Research, however, has a ‘hold’ rating with a target price of Rs 4,250. Even as it expects exports to be under pressure in the near term, it believes that domestic markets will grow in double digits, driven by strong urban demand, better finance availability and favourable base effect. Given the pressure on exports, the brokerage expects Bajaj Auto to underperform peers TVS Motor and Eicher Motors on the volume front.

Given the target prices, there is an upside range to the tune of 14-18 per cent from current levels.