Expensive valuations leave limited upside in Bajaj Auto, caution analysts

Shares of Bajaj Auto fell up to 3.5 per cent at Rs 8,700 a piece on the BSE in Friday’s intraday trade. The shares of the company drained despite reporting good growth in topline and bottomline as analysts cautioned investors on the expensive valuations and potential of limited upside in the stock price. 

On Thursday, Bajaj Auto reported a 35 per cent year-on-year (Y-o-Y) rise in profit after tax (PAT) to Rs 1,936 crore, and a 29 per cent growth in revenue from operations at Rs 11,485 crore in the fourth quarter of Financial Year 2023-24 (Q4 FY24). The results were largely in line with Bloomberg estimates of a 29.6 per cent jump in adjusted net income Y-o-Y and 28.7 per cent growth in revenue from operations.

Despite strong earnings, analysts warned investors on future growth trends as most positives of the company are priced in and the stock is currently trading at high valuations. 

“We expect the domestic 2W segment’s recovery to continue, but a downside risk persists (exports), given higher inflation environment and geopolitical tensions. In our view, current profitability trends are likely to partly reverse, as the mix normalises. Maintain SELL, as most positives are priced in at CMP. Valuations remain expensive at 30X FY2025E core EPS,” said those at Kotak Institutional Equities. 

Here’s what brokerages say on Bajaj Auto

Kotak Institutional Equities: Kotak increased its FY2025-26E earning per share estimates by 5-6 per cent for Bajaj Auto on higher ASP assumptions, and on expectations of the premium motorcycle segment outperforming in the domestic and export markets, higher gross margins, and lower share count due to buyback. 

Overall the domestic 2W industry volumes to increase at a CAGR of 8-9 per cent over FY2025-26E, driven by strong growth in the 125 cc segment and pick-up in EV volumes. However, analysts expect the export 2W segment’s volume recovery to fall below expectations, driven by higher inflation, currency devaluation in select markets and shipping issues due to geopolitical tensions (near-term challenge). 

“We believe most positives are already being factored in at CMP. Maintain SELL, with a revised fair value of Rs 6,200, led by EPS increase, roll-over, increase in multiple from 18X to 20X and Rs 50 per share increase due to PLI incentives,” Rishi Vora and Praveen Poreddy of Kotak Equities wrote in a recent report. 

Dam Capital: The brokerage prefers the 2W space and expects Bajaj Auto to perform well. Factoring healthy margin profile, exports rebound, export potential for quadricycle in Egypt, potential from CNG motorcycle launch and 2W industry’s advantageous position amongst the auto segments, analysts increased valuation multiple for Bajaj Auto from 20x to 22.5x. 

Analysts at Dam Capital believe that, after its recent sharp run up in last few months, most of the positives are priced in and valuation at 22x FY26E leaves limited upside from the current level, therefore it maintained its NEUTRAL rating with a revised target price  of Rs 9,490 (earlier Rs7,650).

Nomura: The Japanese brokerage firm estimates revenue growth of 13 per cent CAGR and Ebitda margins of 17 per cent for Bajaj Auto over FY24-26E on the back of expectations of a cyclical upturn in domestic 2Ws, increasing focus on premium 2Ws and EVs, strong recovery in exports and margin expansion emanating from better scale and mix.

The brokerage said that CNG-powered motorcycle launches planned for June 2024 can provide upside to volume estimates. Nomura maintains its ‘BUY’ call on the stock with a target price of Rs 10,340 based on 30x FY26E core earnings plus cash and investments of Rs 884 per share.

Analysts also highlighted some key risks for the company including lower than expected pickup in rural demand, delay in recovery in demand in Africa and Asia regions due to adverse currency, USD availability issues and weak macros.