Volume outperformance, steady results factored into Bajaj Auto's valuations

The company expects to outperform the 7-8 per cent growth in the domestic 2W industry on the back of growth in the 125cc+ segment and the launch of CNG motorcycle 'Freedom 125'

Bajaj Auto reported steady results in Q1FY25, with revenue surging 16 per cent year-on-year (Y-o-Y), operating profit registering a growth of 24 per cent Y-o-Y, and margins swelling 20.2 per cent. The profitability was aided by 50 basis points (bps) on the accrual of PLI benefits.

The domestic prospects for two-wheelers are healthy, though the response to the newly launched CNG motorcycle is a key monitorable. The management guidance is for gradual exports recovery and there's a need to build the Triumph brand awareness.

Revenue grew 16 per cent Y-o-Y to Rs 11,930 crore, in line with estimates (volumes are up 7 per cent while the average selling prices were marginally higher Q-o-Q).

The operating profit was higher by 24 per cent and 5 per cent Q-o-Q, with margins up 17 bps sequentially at 20.2 per cent (favourable currency movement). The adjusted net profit rose 19 per cent Y-o-Y to Rs 1,990 crore. The surplus cash stands at Rs 16,700 crore.

The company expects to outperform the 7-8 per cent growth in the domestic 2W industry on the back of growth in the 125cc+ segment and the launch of the CNG motorcycle ‘Freedom 125’.

The exports are witnessing a revival led by Latin America though key markets like Nigeria in Africa continue to struggle at 30 per cent of peak volumes. Brazil is expected to emerge as one of the top 3 markets in the medium term.

Bajaj expects Q2FY25 to be better than Q1.

The Freedom 125 has an addressable market of 450-500,000 units/month in terms of mileage-conscious customers in the 100-125cc segment.

Currently, the capacity of 10,000 units/month is to be expanded to 40,000 per month by Q4FY25. The company expects to launch new variants (bottom-end and top-end) in CNG down the line with current bookings at 4200 units.

The company expects consistent volumes of 100,000-plus units/quarter in domestic three-wheelers.

Electric auto volumes are at 3,000 per month, which are expected to grow owing to the distribution expansion (140 locations) and an upwards migration from E-rickshaws (cheaper imported kits). BJAUT aims to be a full-range player in 3Ws, and is not worried about the cannibalisation of CNG 3Ws, as electric vehicles have similar margins as internal combustion engine units inclusive of PLI incentives. 

The e-2W Chetak volumes are seen to be expanding owing to greater reach and the company is targeting 1000 stores by Sep-24 vs 250 now and also looking to ramp up the sub-Rs 100,000 variant.

Bajaj targets to become the second-largest E-2W player soon. Though E2Ws are still not profitable, increasing volumes are not hurting margins proportionately due to strong cost control.

The Triumph distribution is to expand to 150 stores by H1 (vs 100) now. The company focuses on brand-building beyond metros in India, and on retails in export markets. The PLI incentives have started being accounted for from Q1 and EVs formed 14 per cent of domestic revenues and PLI incentives contributed 50 bps of margin expansion.

The company expects a 70 bps raw material cost increase in Q2 and it has taken a small (0.35 per cent) price hike in July. The capex will be Rs 700-800 crore in FY25 with spares sales at Rs 1,350 crore.

Motorcycles contributed around 76-78 per cent of domestic revenues in Q1FY25, with scooters' contribution of 6-7 per cent and 3W at 15-16 per cent.

The motorcycle contribution has dropped from 81-82 per cent in Q1FY24 with the dip coming in the 100-125cc segment. Valuations are at around 31 times P/E on FY25 earnings per share estimates. This is somewhat on the higher side. Bloomberg consensus shows 21 ‘buys’, 14 ‘sells’ and 10 ‘holds’ and an average target that is lower than the current market price.