Bajaj Auto rides high on strong 3-wheeler outlook; stock gains over 5%

Margin gains from the category could, however, be offset by push in entry-level bike segment

The stock of Bajaj Auto gained over 5 per cent on Friday after the company announced an expansion of three-wheeler capacity to cater to a spurt in demand, as well as tailwinds from regulatory changes on three-wheeler permits. The company is expanding its three-wheeler and quadricycle capacity from 0.84 million to a million units per annum. 

Demand for three-wheelers has gone up as new permits are being released in Maharashtra, Karnataka, Andhra Pradesh and Delhi. In fact, three-wheeler sales for the company have been growing at a rapid clip over the last few quarters, with growth (including exports) in August at 45 per cent. Three-wheeler sales volumes have been over 60,000 units a month for 10 months in a row, with the trend expected to continue. The company achieved volumes of 74,169 units in August, with equal contribution from the domestic as well as exports segments. 

The other trigger is the move by the Centre to remove permits for three-wheelers that are powered by alternate fuels, such as compressed natural gas. While no notification has been issued by the government, if implemented across states, it will boost sales of vehicles in this category. Three-wheelers powered by non-conventional sources contributed about 48 per cent of sales in the category.  Abhishek Jain of HDFC Securities says the company will be the biggest beneficiary from abolition of permit requirement, given it commands an 86 per cent market share in the alternate fuel three-wheeler segment. 

The company, which has reported a 64 per cent jump in three-wheeler sales in FY19, should benefit both from the domestic surge in demand as well as higher exports owing to the sharp depreciation of the rupee. 

While higher three-wheeler sales and a strong premium segment portfolio in the form of Pulsar, Avenger and KTM augur well — given the higher growth rates of premium bikes — what the Street will keep an eye out for is sales in the entry level motorcycle segment, and the impact of the same on margins. Analysts believe aggression in that segment, while helping the firm improve penetration and market share, will also offset volume and profitability gains from domestic and three-wheeler exports.