Bajaj Auto volumes get back on track
Realisations will be driven by weaker rupee and improving product mix in favour of premium bikes, beside higher three-wheeler sales
The Bajaj Auto stock has gained 10 per cent over four trading sessions, given the performance in the first three months (April-June of the financial year. With strong volumes in the quarter, operating profit is expected to improve by 64 per cent over the year-before period. This, a premiumisation trend, a high share of three-wheelers and export should rub off well on both revenue and margin.
The immediate trigger for the stock has been the 65 per cent year-on-year growth in volume to over four million units in June, higher than the expectation. The outperformance was largely due to the 86 per cent rise over a year in the domestic segment, as compared to a 29 per cent increase in May. Some of the gain was due to a lower base but the company has gained market share, given the four per cent growth over May while peers have seen flattish performance.
With 200,000 of monthly motorcycle sale in India during the June quarter and the festive season ahead, it could do better than the 2.1 million units of sales estimated for 2018-19.
On export, higher crude oil prices are supporting the stronger demand from abroad. Shipment was up 44 per cent in June and 31 per cent in the June quarter, aided by higher petroleum prices, leading to improved availability of foreign exchange, according to Bharat Gianani of Sharekhan.
If the current trend continues, export should hit two million in FY19. Say analysts at Morgan Stanley, “The rupee's depreciation is making export more lucrative, as is the improving mix, with more Pulsars being exported than ever before.”
The other margin trigger is a strong show in three-wheelers, where sales grew 66 per cent in June. For eight consecutive months, overall threewheeler volumes have been above 60,000 units a month and the trend is expected to continue, with equal contribution from the home and export markets.
The street is also keeping an eye on the domestic market, 56 per cent of its volumes. The trend of premiumisation is expected to aid Bajaj Auto, the market leader with a 31 per cent share. Premium motorcycles are growing at a faster pace than executive and entrylevel ones; they now are 24 per cent of volumes as compared to 16.6 per cent in 2010.
Analysts at Centrum believe growth catalysts such as rising household income and aspirations, and exciting launches which have helped sustain the growth so far, are intact. Over last year, the company launched the Avenger Street 180 and Pulsar NS160; it is positioned well to cater for the demand on premium bikes. These include the Pulsar range, KTM, Dominar and Avenger. It is also expected to launch a mid-segment (250750cc) motorcycle in collaboration with Triumph in 2020.
The worry in the domestic market is the competition, especially in the entry segment where the company has cut prices for its CT100. This might be only for the monsoon but if it continues, the margin will be hit; these are not high on profitability. Though the stock has gained in recent sessions, it still trades at less than its eight-year average multiple of 16 times and should be a good long-term bet.