Bajaj Auto: Qute launch positive, but success of new products key

Domestic volumes must increase, if the stock wants to be re-rated significantly

The Bajaj Auto stock gained two per cent on Friday, after the company announced plans to launch its quadri-cycle Qute in Europe. (Quadri-cycles are four-wheeled micro-cars, with limitations in terms of weight, power, and speed).

The company is exporting the vehicle priced at $2,000 (Rs 1.32 lakh), after getting the go-ahead from European authorities. The final price would depend on local taxes and other levies in various markets. Starting with an initial monthly capacity of 1,000 units, it could be increased to 5,000, based on demand.

At peak capacity, the product should fetch about Rs 800 crore, about four per cent of current revenues. What is not known yet is how much of margins the Qute will earn. If it is along the lines of three-wheelers, it would have a larger influence on profits.

While the plan to sell the Qute in 16 export markets is a positive, the bigger scenario will be approval for its sale in India — the Supreme Court is expected to give its verdict in mid-October. Bajaj has an 80 per cent market share in the urban small commercial vehicle segment (auto-rickshaw). Given its first-mover advantage and its dominance in the urban market (Tata Motors and Mahindra & Mahindra have better presence in rural markets), analysts at IndiaNivesh say the company remains the best bet on quadri-cycles.

The other positive will be 100,000 new three-wheeler permits in the Mumbai Metropolitan Region (MMR) in FY17. (MMR consists of Mumbai and its satellite towns.) Given Bajaj is expected to achieve three-wheeler sales of 260,000 units in FY16, the new permits are significant. Three-wheelers account for 14 per cent of its volumes and over a quarter of its revenues. Aditya Makharia of JPMorgan says three-wheelers are more profitable as their Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins are more than 25 per cent. He says new orders will be an important growth driver for Bajaj in FY17.  

This is critical, as Bajaj’s domestic two-wheeler portfolio has been witnessing muted demand for a few quarters now. In August, its two-wheeler sales were 341,965, up 1.5 per cent year-on-year. Sales were boosted by record exports in August, and now sales outside India account for 53 per cent of overall volumes. To tap the expanding sport motorcycles’ segment, Bajaj is launching Avenger bikes this week. Along with some recent launches, FY16 will see many new products/variants. The success of new products holds key. Among Bajaj’s three core brands — Discover, Platina, and Pulsar — the demand for the Discover has not picked up significantly.

Of 58 analysts tracking the stock, half suggest a buy. The falling currencies of Nigeria and Egypt are worrying investors. Given the two markets account for 50 per cent of Bajaj’s export revenues, the falling currencies could hit volumes, export revenues, and margins. But Bajaj’s leadership in such markets could give it a pricing edge over competitors from China.