PremiumIn view of lower 2W export volume estimates and reduced margin assumptions due to weaker mix, Kotak analysts have cut Bajaj Auto’s FY23-25 earnings per share estimates by 7-8%. They have also downgraded the stock to ‘Reduce’ from ‘Add’
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Bajaj Auto Ltd. has two main concerns. One, chip shortage, and the second, weakening outlook in its export markets. While the issue of chip shortage is expected to ease in the coming months, export concerns seem here to stay. True, this headwind also weighs on Bajaj’s two-wheeler (2W) peers, Hero MotoCorp Ltd. and TVS Motor Co. Ltd. But Bajaj Auto is at a relatively greater risk, as exports account for a much larger part of its total sales volumes. For perspective, in FY22, Bajaj’s export volume share stood at 58% versus about 38% for TVS Motor.
In the past two months, Bajaj’s 2W export volumes have dropped sequentially. “Average monthly 2W export revenues from India to Nigeria (Nigeria forms 15-20% of Bajaj Auto’s total volumes) have declined by 33% in FY23 so far as compared to FY2022 levels due to sharp appreciation of USD as well as inflationary pressures," said analysts at Kotak Institutional Equities in a report on 14 September. Also, average monthly 2W export revenues to Nepal and Bangladesh--key markets for Bajaj Auto--have fallen 10-38% year-on-year in FY23 so far, they added.
Subdued overseas sales are likely to affect overall margin performance as the exports make for higher margins. Also, rural demand in the domestic market is yet to pick up pace. Even so, softening commodity costs should provide some respite.
Separately, rising electrification in the three-wheeler (3W) segment has been posing a risk to Bajaj’s market share here. The company’s 3W portfolio includes compressed natural gas (CNG) vehicles but it is yet to launch an electric 3W (e-3W). It could benefit from the increasing traction in e-3W segment on the back of favourable government policies and increasing CNG prices.
In view of lower 2W export volume estimates and reduced margin assumptions due to weaker mix, Kotak analysts have cut Bajaj Auto’s FY23-25 earnings per share estimates by 7-8%. They have also downgraded the stock to ‘Reduce’ from ‘Add’ and revised their target price to ₹3,800 from ₹4,200, based on the discounted cash flow methodology. Shares of Bajaj Auto stock traded at ₹3,850.5 apiece on the National Stock Exchange.