Sharekhan interacted with the management of Bajaj Auto to understand the business outlook in the wake of the second wave of COVID-19 for its businesses in India as well as globally. In the domestic market, Bajaj Auto is witnessing positive action in the two-wheeler markets lately, as the states are lifting lockdown restrictions in the country. Bajaj Auto remains cautious and would like to see how the demand shapes up. The dealers are having inventories of around 50 days, which is higher than normal inventories of 5-6 weeks.

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Bajaj Auto continues to remain positive on its export volumes, as most of its export destinations are less impacted by the second wave of COVID-19. However, some export markets have seen sluggishness in the pace of sales due to COVID-19. The company has reported growth in average monthly export dispatches in April and May of 2021 at 2,32,289 vehicles (2W+3W) as against average monthly export dispatches of 2,13,194 units during August’20 – March 21, which reflects demand recovery after first wave of COVID-19. Bajaj Auto expects to maintain average monthly exports run-rate of 1,90,000-2,00,000 vehicles over FY22. Bajaj Auto has positioned itself strongly in export markets with a focus on Nigeria, Bangladesh, Philippines, and Colombia, which accounts for 50% of its 2W export revenue.

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Bajaj Auto has improved its brand equity in these markets, which will help to improve its market share further going forward. In FY2022, we expect demand to arise from urban markets as well, where Sharekhan believes Bajaj Auto will be a major beneficiary in the 2W space, given its dominant position in the premium bike segment. Demand for 3Ws is also expected to improve. This will help Bajaj Auto to improve its margin aided by richer product mix and operating efficiencies. Bajaj Auto will also benefit from the new launches in the premium segment, which it has lined up in the premium segment over the next 12-18 months. Bajaj Auto’s management continues to focus on profitability-led growth, while introducing at least one model (either new or upgraded model) every quarter. Export growth is organic and will continue to be a long-term driver for Bajaj Auto.

Bajaj Auto aims to outpace the industry in international operations, driven by increased distribution reach and strong product portfolio in premium bikes.Bajaj Auto expects the trend of premiumisation to continue in the domestic 2W industry, which would enable it to gain market share, especially in 125cc+ markets. Given a robust outlook, we have increased our earnings estimates, aided by increase in 7-8% export volumes and 20 bps further improvements in EBITDA margin. Sharekhan expects Bajaj Auto’s earnings to report a 23.2% CAGR during FY2021-FY2023E, driven by a 21.4% revenue CAGR and 120 bps improvement in EBITDA margin to 19% in FY23E from 17.8% in FY21. Sharekhan retains Buy rating on Bajaj Auto for price target of Rs 4800.