Headwinds on demand, cost fronts to keep Bajaj Auto under pressure

Higher exports may offset some of the volume, cost pressure

Led by Bajaj Auto, domestic two-wheeler sales in February continued to disappoint posting a double digit decline over the year ago quarter. Bajaj Auto reported a 35 per cent decline in domestic two-wheeler sales followed by Hero MotoCorp at 32 per cent and Eicher Motors at nearly 20 per cent. Domestic two-wheeler despatches of TVS Motor were relatively better, falling 11 per cent over the year ago period. The stock price performance reflected the wholesales numbers with Bajaj Auto stock shedding 4.6 per cent, the most among two wheeler makers.  

Varun Baxi of Prabhudas Lilladher Research says that Bajaj Autos numbers came in a tad below expectations. While weak rural sentiments impacted the domestic segment, exports were lower on account of a weak three-wheeler performance.

Given that the export segment accounts for 64 per cent of overall volumes in February, the street will keenly track Bajaj Auto’s export performance. While motorcycle exports were flat, three wheeler exports were down 23 per cent in February. Though some of the export decline for Bajaj Auto and TVS Motor was due to high base, the rising crude oil prices could improve demand given that the key markets are major crude oil producers/exporters.

In the domestic two wheeler segment, demand is healthy for premium two-wheelers (above 150cc), while impact of price hikes and fuel inflation on consumer sentiment is hurting at the lower end of the demand pyramid, says Rohan Kanwar Gupta, vice president & sector head - Corporate Ratings, ICRA.

While demand remains robust for premium motorcycles, the management of TVS Motor and Bajaj Auto indicated that sales in this segment were impacted by the shortage of semiconductors which has hampered production. The former is cautiously optimistic that the supply of semiconductors will improve in the coming months. The recovery in volumes in the premium segment is critical for market leader Bajaj Auto both in terms of operating leverage and product mix as this will impact its profitability.

At the current price, the Bajaj Auto stock is trading at 15.5 times its FY23 earnings estimate and at a 32 per cent discount to TVS Motor. While valuations are attractive, multiple headwinds both on the demand and cost fronts would keep Bajaj Auto and the two-wheeler pack under pressure in the near term.