Expect 400,000 + volumes in March 2021– Bajaj Auto

Update on the Indian Equity Market:

On Tuesday, Nifty closed 1.1% higher at 14,919. Within NIFTY50, TATAMOTORS (+5.1%), M&M(+4.6%), and WIPRO(+4.5%) were the top gainers, while ONGC (-2.6%), HDFC(-1.2%), and DRREDDY (-1.1%) were the top losing stocks. Among the sectoral indices, AUTO (+3.2%), IT (+3.0%), and FMCG (+1.4%)were the top gainerswhile PSU BANK (-0.2%) was the only sector to end with losses.

Expect 400,000 + volumes in March 2021– Bajaj Auto

Excerpts of an interview with Mr. Rakesh Sharma, ED, Bajaj Auto, aired on CNBC-TV18 on 1^st March 2021:

• Bajaj Auto reported total wholesale volumes of 375,017 units for February 2021, a growth of 6% YoY. According to Mr. Sharma, there was a shortfall in the volumes due to several factors.
• Domestic 2-wheeler retails were higher than wholesale as Bajaj Auto was deliberately clearing stock. February onward, Bajaj Auto has started to focus aggressively on the entry-level segment.
• The 2^nd big shortfall was in exports, as there was a big spill over due to shipping container schedule. Bajaj Auto also lost some volumes in premium segment in domestic as well as exports market.
• As all the above factors go away, Mr. Sharma expects monthly volumes to again go beyond 400,000 units in March 2021.
• A 4% hit from raw material inflation is expected in 4QFY21. Bajaj Auto’s response to this will be after a very careful view of the fragile demand recovery.
• Sharma estimates that the domestic 2-wheeler industry retails had a YoY decline in February 2021.Bajaj Auto saw a YoY retail growth. But a decline in retail volumes is not a good sign for the industry.
• Bajaj Auto has taken a price hike in 3QFY21, but that has not impacted the customers significantly. The strategy is to increase the prices and simultaneously improve the product proposition for the customer. Further hikes will have to be taken in fragments, and cannot be taken at once.
• Bajaj Auto is seeing a steady increase in 3-wheeler sales which is an important segment for the company. This is the tipping point for Bajaj to reach out to the customer with innovative financing schemes.
• As Bajaj Auto was gaining market share in above 125 cc segment, they were losing in the below 125 cc segment. To address this, Bajaj Auto has now taken some initiatives which will help them grow both the segments. But for the industry, the below 125 cc segment has suffered.

Asset Multiplier Comments:

• For the month of February 2021, Hero Motocorp has reported domestic 2-wheeler wholesales of 484,433 units, a growth of 0.8% YoY. For the same period, TVS Motors has reported 195,145 units, a growth of 15% YoY. Against this, Bajaj Auto’ s domestic 2-wheeler segment reported 1% YoY growth.
• For domestic 3-wheelers in February 2021, Bajaj Auto reported a 27% YoY decline in wholesales while TVS Motors reported a 24% YoY decline.
• Sales in the 3-wheeler segment saw steeper declines since the covid-19 pandemic on account of lower mobility. Several banks and NBFCs had taken a very cautious approach to auto lending. As 3-wheelers are predominantly purchased through loans, low finance availability put a roadblock in 3-wheeler volume recovery.

Consensus Estimate (Source: investing. com and market screener websites)

• The closing price of BAJAJ-AUTO was ₹ 3,950as of 2-March-2021. It traded at 25x/ 20x/ 18x the consensus EPS estimate of ₹ 158/193/221 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 3,950/- implies a PE multiple of 18x on FY23E EPS of ₹221/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”