Growth at Bajaj Auto has outperformed industry

Update on the Indian Equity Market:

On Monday, Sensex ended at record closing high of 40,302, up 137 pts; Nifty ended at 11,943; IT index was the biggest sectoral gainer, while auto stocks bled the most. Infosys share price closed 3% higher at Rs 709 after the firm said it has not received any prima facie evidence so far to corroborate any of the allegations made by the anonymous whistle-blower. Infosys, VEDL, Tata Steel, HDFC, ONGC were among the biggest gainers, jumping up to 3%. On the other hand, Maruti Suzuki, Hero MotoCorp, IndusInd Bank, Tata Motors were among the biggest losers, shedding up to 2.5%. Among sectoral indices, NIFTY IT (+0.8%) NIFTY Metal (+2.8%) closed higher while NIFTY Auto (-1.4%), NIFTY media (-3.3%) ended on a negative note.

Growth at Bajaj Auto has outperformed industry

Key takeaways from the interview of Mr Rakesh Sharma, Executive Director, Bajaj Auto; dated 4^th November 2019:

• Mr Sharma stated that the company reported the highest ever retails of all business in its history by a wide margin. The motorcycle business turned in a retail sales performance of 400,000 units plus, which is ~50% growth YoY. It grew by 28% over the festive period of last year. Small commercial vehicle (CV) business reported retail sales of 43,000 plus and KTM business doubled reporting the highest ever retail performance. So, it was a wonderful month for Bajaj Auto and the company is happy that almost half of the growth in domestic motorcycle by newly launched products (in the last six months) which have done exceedingly well and brought down the inventory levels.
• Mr Sharma said that they had proactive engagements with the channel where it was informed that come October Bajaj Auto will be easing the burden.
  
• Mr Sharma added that he has not seen such low channel inventory in the last 18 months and suspects that the company should have moved the market share needle as well.
  
• When asked about the future performance he said that the economy is entering a naturally lower part of the quarter now. Post the festive seasons, the sales do drop so there is obviously a combination of postponement that has occurred from July-August and a bit of advancement that would have occurred from November. All of these combine to give the surge during the festive season. So, there is a natural down cycle that we will now hit and added on this will be the uncertainty in the minds of a lot of people about the BSIV-BSVI transition.
  
• He refrained from commenting that Bajaj Auto would see similar kind of numbers, but he confirmed that this festival season has served as a very good trigger to bottom out what the Indian industry was experiencing.
  
• Mr Sharma said that the company still needs to navigate the turbulent change that is impending, which is BS-IV to BS-VI, and will have to see how the consumer behaviour will occur during this change.
  
• Mr Sharma informed that Bajaj Auto has always been outpacing the market by 5-8% points and thinks that Bajaj Auto outpaced the industry growth by at least 15% points on the back of new products. Therefore, he is confident of market share expansion.
  
• When asked about the price cuts and margins he commented that the company’s strategy of uplifting the consumer step by step has helped the realisation per vehicle to move upwards. The stocks are now in a very manageable zone.
  
• Mr Sharma said that softer raw material costs, steady foreign exchange rate (45% of revenues come from overseas sources), improved portfolio and favourable business mix is contributing to margin expansion but would not like to further comment on margin as they are in an ambiguous situation in November-December-January.
  

Consensus Estimate (Source: market screener website)

• The closing price of Bajaj Auto was ₹ 3,212/- as of 04-November-19 and traded at 18.4x /17.2x /16.7x the consensus EPS for FY20E / 21E / 22E of Rs 176/188/194 respectively.
• Consensus target price of ₹ 3,049/- implies a PE multiple of 15.7x on FY22E EPS ₹ 194/-.