Auto sales, which was already in a cyclical downturn when Covid happened, has been taking its own time to recover. From an 18 per cent year-on-year fall in domestic volumes in 2019-20, the industry saw volumes further shrink by 13 per cent in 2020-21. In the first nine months of this fiscal, overall industry volumes is down 1 per cent so far. Two-wheeler sales has been the worst hit, with volumes in this segment still down 6 per cent year-on-year in April – December 2021. On the other hand, passenger vehicle (cars, UVs, vans) sales are well into positive territory, despite the disruption caused by the semi-conductor shortage. Commercial vehicles sales have rode on the economic recovery too. While Covid did bring in a preference for personal mobility, commuter bikes (75-110cc) which constitutes 50-60 per cent of the total motorcycle sales volumes in India, is a price sensitive segment. Price hikes over the last two years due to reasons ranging from BS VI transition to high input costs as well as rise in fuel prices, could have kept demand subdued. Electric bikes too are beginning to look more attractive for a section of consumers, with the 50 per cent hike in demand incentives for e-bikes brought in from June 2021, working in its favour. In the near term, two-wheeler sales could continue to remain under the weather.

In this context, among the traditional two-wheeler players, Bajaj Auto is on a better wicket for three reasons. One, Bajaj’s focus on the mid and the premium segments has ensured that the company has seen only a 1.5 per cent drop in volumes in the first nine months of this fiscal, which is better than the industry performance. Two, its export focus and strong foothold in domestic three-wheelers - both of which are higher margin businesses – is also an advantage. Besides, the company is upping the game in EVs too. Given these factors, long-­term investors can accumulate the stock in small quantities on dips related to broader market volatility. Being a largecap stock, it also provides downside protection should the markets go into a bearish phase in the near term. The stock is now 25 per cent down from its one­-year high recorded in February 2021. At Rs 3425 now, it trades at about 19.8 times FY22 earnings (Bloomberg consensus). This is at a slight premium to Hero MotoCorp which trades at 18.3 times, but is in line with Bajaj Auto’s historical averages.

Riding out the bump

Over the last few years, Bajaj has been building its market share in the 110-125 cc segment bikes. (rather than in the 75-110cc segment). From only about 5 per cent in 2017-18, Bajaj’s market here share moved up to 8 per cent in 2019-20 and has jumped to 21 per cent as of end December 2021. The growth this fiscal was driven by the launch of the Pulsar 125 NS in April 2021. Besides, the company is also a leader in the 125-150 cc segment with a 64 per cent market share and has a good presence in the (higher cc) premium segments through the KTM, Dominar and Pulsar brands. Premium bikes have been more hit by the semiconductor shortage and this situation may not change soon. But these underpenetrated segments have good growth potential over the long-term as incomes grow and as appetite for biking/ adventure increases. Moreover, there is no immediate threat of EVs taking over the sporting /adventure biking segments.

Secondly, the company’s presence in domestic three-wheelers and exports will stand it in good stead. The opening up of the economy post the second wave has seen the domestic three-wheeler industry grow at 34 per cent in the first nine months of this fiscal. Bajaj’s volume growth was much higher at 75 per cent in this period. Exports now contribute to 56 per cent of the revenues for the company and have seen a 33-35 per cent volume growth in the first nine months of this fiscal. Key markets such as Sri Lanka and Egypt are facing some headwinds, with the former wanting to cut down on imports and the latter, wanting to shift to CNG as well as higher speed vehicles. However, over the last 4-5 years, the company has consciously entered new markets such as Iraq, Philippines and Cambodia, which are seeing good offtakes. This can help mitigate to an extent, any fall in export volumes to Sri Lanka/Egypt. It is noteworthy that about 60 per cent of the passenger and cargo three-wheelers (combines) sold domestically are CNG variants. In exports though, it is negligible.

Both domestic three-wheelers and exports are also traditionally higher margin segments for Bajaj.

Upping the ante on EV

In e-bikes, traditional IC engine manufacturers are currently on the back foot with companies such as Hero Electric, Okinawa and Ather, for instance, taking the lead in terms of volumes sold. Bajaj has Chetak in this segment and has consciously expanded its presence across 12 more cities in recent months, from the earlier 8 cities and currently has an order book of 10000 vehicles. It has also indigenised certain components to side step supply chain issues, though chip shortage still brings some uncertainties.

Development of electric three-wheeler is in the final phase and a launch is expected early next fiscal. However, the company considers availability of retail financing and visibility on resale value as key factors in adoption of e-3 wheelers and favours CNG more currently.

It is notable that the company is setting up an EV facility at Akurdi under the PLI scheme - with a capacity of 5 lakh vehicles and a total investment of ₹1000 crore. The company’s EV strategy is to launch vehicles based on specific use cases ( in terms of speed, weight and convenience). It is hence adopting a platform-based approach rather than a vehicle-based approach.

One needs to wait and watch as to how Bajaj’s EV strategy pays off over the long-term.

For the nine months ended December 2021, net sales grew by 30.4 per cent to ₹24408 crore and net profits, by 10 per cent to ₹3550 crore (standalone). Operating margins came in at 15.6 per cent vs. 18.5 per cent a year ago, predominantly due to higher input costs, though price increases and favourable export realisations helped to an extent.

Why
Diversified segments and markets
Valuation in­-line with historical mean
EV strategy in motion, execution awaited
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