The upturn in the auto cycle post the Covid pandemic fuelled massive gains in many auto stocks. Bajaj Auto is no exception.  Investors who took exposure to Bajaj Auto based on our ‘buy’ call in early March 2020 as well as our ‘accumulate’ call in January 2022 have reaped rich rewards.

The stock is up 224 per cent and 159 per cent since the ‘buy’ and the ‘accumulate’ calls, respectively. The Nifty’s 105 per cent and 28 per cent in the period since these two calls pale in comparison. Fundamentally, the company is on a good wicket. It is on a roar in the domestic three-wheeler segment, a highly profitable business. Focus on executive segment, bikes has helped the company grow better than the industry in this pocket during the upcycle of the last 1-2 years. Exports have been a bit of a pain point. But as of now, better dollar realisations are making up for the loss of volumes.

Recognising the tailwinds, the market has re-rated the stock handsomely. It now trades at about 35 times its trailing earnings, vs the 5-year average of 21 times. Considering the massive gains and expansion in valuation, it would be prudent for investors to book partial profits by tendering their shares in the ongoing buyback offer for ₹10,000 a share (a 12.6 per cent premium to last Thursday’s closing price). The auto cycle too could turn in the coming fiscal, though two-wheeler sales volumes domestically continue to be in healthy double digits now.

For small shareholders (ie, residents holding nominal share capital up to ₹2 lakh), the buyback entitlement stands at seven shares for every 27 held. This implies an acceptance ratio of 26 per cent if everyone tenders. In reality, everyone may not tender. If only 80/50/30 per cent of the shareholders tender, the acceptance ratio goes up to 32/52/87 per cent, respectively. To the extent of acceptance, you can lock into the gains, while continuing to hold your remaining exposure for the long term. Shareholders as on February 29, 2024 (record date) are eligible to participate in the buyback. The offer closes on March 13, 2024.

Favourable winds

Though passenger vehicle sales recovered in FY21/22, two-wheelers saw meaningful recovery only in FY23, growing by 16.9 per cent year-on-year. It is going strong this fiscal as well, growing at 11.3 per cent in the first nine months.

Bajaj Auto was always an executive segment play among listed two-wheeler OEMs in India, finding sweet spots outside of the 75-110 cc commuter segment bikes, where Hero was the dominant player. But, in the slowdown that ravaged the industry even before the pandemic set in, the company went all out to make a dent in the commuter segment, cutting prices in a bid to gain volumes. By FY20, it had a 17 per cent market share in commuter bikes, from 12.8 per cent in FY18. That effort, which was margin-diluting, thankfully came to an end with commuter segment sales facing pressures from BS IV transition, as well as input and fuel costs going up, among other things.

Bajaj Auto has played the recovery in two-wheeler sales by going back to what it does best — focussing on higher segment bikes by product differentiation and positioning.  In the 110-125cc segment, for instance, its market share has steadily improved from 8 per cent in FY20 to 27.5 per cent in April-January 2024. Aided by its Pulsar variants straddling the >125-200cc segments, the company has seen its market share increase in this bracket too. The Pulsar 125/NS125, upgrades of the Pulsar 160, 200NS and the new Pulsar N150/N160, have been driving offtakes for the company.

Three-wheelers, which fetch higher margins than bikes, have also been a success story for the company during the current upturn. Bajaj Auto has a 75 per cent and a 47 per cent share now in the passenger and goods segments respectively. According to the company, three-wheeler sales are being driven by CNG powered vehicles which offer better economics. Bajaj Auto, which has always had better market share here, compared to the diesel segment, has been a big beneficiary.

The cyclical upturn has helped the company deliver healthy double-digit profit growth in the first three quarters of FY24. In Q3FY24, net sales grew 31 per cent to ₹11,833 crore and profits by 37 per cent, to ₹2,042 crore. Operating margin was back to its aspirational 20 per cent after many quarters, thanks to a combination of benign input costs, good volumes and richer product mix leading to better realisations.

What’s working and not

With EVs being a multi-year growth story, what works for the company are the successful initiatives on this front. E-3 wheelers are increasingly being used for last mile connectivity and e-autos are seeing good adoption too. The company expects to be present in 50 cities (23 in Q3) by end of this fiscal and then further to 200 cities. Importantly, with lower battery/cell costs compared to a two-wheeler, no additional manufacturing or other costs and PLI benefits, e-three-wheelers are not margin dilutive.

On the e-2-wheeler front, the company has now been able to right-price the Chetak, bringing it on par with key competitors and has also expanded its footprint, reaching about 160 cities now. A new premium variant has also been launched recently and another, expected in Q1FY25. Chetak offtakes are expected to improve to 15,000 a month in Q4, from 10,000 earlier.

In its heydays, exports brought more than half the revenues. However, things have not been well on this front in recent times. Export volumes to Bajaj’s key markets such as Africa and South Asia have dwindled due to issues such as inflation impacting demand and the short supply of dollars. The Red Sea imbroglio did not help either. Exports constituted about 32 per cent of revenues in the December quarter and the company is foreseeing only a gradual improvement on this front. The domestic side of the business, though, may continue to make up for it in the near term, though the cycle could slow down over the medium term.

To conclude, the long-term growth story is definitely promising for Bajaj Auto. But, since we are well into the upcycle now and it looks priced in, investors can book partial profits in the buyback and re-enter, if need be, at lower levels when opportunities come up.

Why
Stock has tripled/doubled since our earlier calls
Expansion in valuation
Book partial profits by tendering to lock into the gains

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