Bajaj Auto: Why a strong Q2 show failed to give two-wheeler stock a lift

Shares of Bajaj Auto rose just over 1 per cent in Monday's trade even as the two-wheeler maker reported a strong set of September quarter results, thanks to doubts over the sustenance of the recent strong demand, weak exports and delay in the launch of e-three wheeler. Analysts said the share buyback that supported the stock recently is over. Citing lack of catalysts, they have a ‘Neutral’ or ‘Hold’ rating on the counter.

The auto major on Friday clocked a 20 per cent year-on-year (YoY) rise in standalone profit at Rs 1,530 crore against Rs 1,275 crore in the year-ago quarter. Revenues for the quarter rose 16 per cent YoY to Rs 10,203 crore compared with Rs 8,762 crore in the same quarter last year, the company told BSE.

Following the development, the scrip rose 1.5 per cent to hit a high of Rs 3,624 on NSE. Bajaj Auto's stock price has grown at 1.5 per cent compounded annually over five years, underperforming broader the Nifty Auto index.

ICICIdirect said continued to recommend a 'Hold' on Bajaj Auto, primarily tracking slower pace of volume recovery in both domestic and export markets and delay in e-three wheeler launch. It revised its estimates and now values Bajaj Auto at Rs 3,910 against Rs 4,180 earlier.

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Nomura India said volume growth will continue to face headwinds over the next six months due to slower recovery in the domestic two-wheeler market; and risks to exports due to economic slowdown.

"On the positive side, there will be margin tailwinds from weaker rupee-dollar (100 bps over 2QFY23) and commodities (up 100-200 bps). However, with volume growth risks, we see lack of catalysts and maintain Neutral rating," its said while suggesting Rs 4,021 on the stock.

Mansi Lall, Research Associate at Prabhudas Lilladher said Bajaj's performance was slightly above industry expectations. This, she said,  was driven by price increases, cost management, and better exchange rates.

"Domestic two-wheeler sales witnessed healthy improvement in Q2 led by pent-up festive season demand and channel filling. However, the sustainability of this demand is still questionable," Lall said adding that Bajaj has consistently lost market share in the above 125cc segment, from 32 per cent in FY19 to 22 per cent in FY22.

"Export is a major contributor to Bajaj’s revenue. However, the deteriorating situation in these markets due to weak macros is likely to be a threat to Bajaj’s volumes,” she said.

Motilal Oswal said while the Bajaj's India two-wheeler business is showing signs of recovery, exports have bottomed out. Bajaj Auto's market share would benefit over the long term from the premiumisation trend, the opportunity in exports, and the potential sizeable position in the Scooter market via EVs.

"However, a large part of its India profit pool (of premium motorcycle and three-wheelers) is vulnerable to a possible disruption from electrification," it said adding that the stock's valuation at 16.2 times FY23E consolidated EPS, largely captures the expected recovery.

Bajaj's dividend yield of 5-5.5 per cent would support the stock, it said.