Double-digit decline to continue in 4QFY22E as well – Bajaj AutoRujuta Tamhankar
Update on the Indian Equity Market:
On Monday, NIFTY closed in the red at 17,625 (+1.6%). Among the sectoral indices, PRIVATE BANK (+2.7%), BANK (+2.7%), and FINANCIAL SERVICES (+2.5%) closed higher while PHARMA (-0.5%) and HEALTHCARE (0.4%) closed in the red. COAL INDIA (+6.4%), EICHERMOT (+4.6%), and BAJFINANCE (+3.6%) were the top gainers. CIPLA (-1.3%), DR REDDY (-1.0%), and M&M (-0.8%) were among the top losers.
Excerpts from an interview of Mr. Rakesh Sharma, Executive Director, Bajaj Auto with CNBC-TV18 dated 3rd January 2022:
- On the demand environment, the company expects volume cutbacks in a variety of categories, including retail, rural, and urban.
- The industry still facing a double-digit decline. Retail sales have dropped by 15%-17%, which is a big drop. The company does not see any bottom in sight. The management does expect the double-digit decline in volumes to continue, especially in the mass market group, in 4QFY22E as well.
- The majority of the company’s 2-wheeler demand comes from the lower-income segment of the economy. Since the 2-wheeler industry has been affected during FY20 – FY22, and the economic recovery has not yet trickled down to this sector, the management does not see demand picking up. The COVID issue has receded and the decline in demand is driven by the economic performance.
- Despite this, the firm has increased its market share by 3% in the previous three quarters. The business anticipates a 20% market share in the motorcycle industry by FY22E.
- Within the EV space, the company is preparing to shift from ICE to electric with a positive outlook. The company had invested Rs 3,000 million for a capacity of 5,00,000 in their new electric vehicle plant. Their first EV will be rolled out in June-2022 from the company’s Akurdi production site.
- The company said that the key constraint is related to the supply of EV-specific components. Supply is volatile and uncertain which makes it difficult to boldly plan bigger volumes in the immediate terms.
- India’s two-wheeler market is still under-penetrated. The country’s demographic division, as well as the pace of urbanization and road penetration, have a direct influence on demand for two-wheelers. When compared to Southeast Asia, India lags in terms of these fundamental characteristics that influence demand. So, the demand components are in place, but there is a problem with purchasing power or the amount of money in the hands of the people. This has an impact on the ultimate demand.
- Retail financing, which is performing significantly better than cash sales, indicates that individuals do not have enough cash in their pockets. However, as retail lending spreads into rural regions, this will be critical in fuelling demand growth.
Asset Multiplier comments:
- Commodity inflation and a chip scarcity may continue to have an impact on margins and demand fulfillment in 2HFY22E and FY23E.
- Strong brand image, product innovation, and expanding market share will eventually fuel Bajaj Auto’s future sales. We anticipate that the firm will benefit from the premiumization trend and export potential. Moreover, the company has the opportunity to build its EV 2-wheeler scooter market.
Consensus Estimate: (Source: Market screener website and Investing.com)
- The closing price of Bajaj Auto was ₹ 3,274 as of 3-January-2022. It traded at 18x/15x/13x the consensus Earnings per share estimate of ₹ 177/ 211/ 242/- for FY22E/FY23E/FY24E respectively.
- The consensus average target price is ₹ 3,976/- which implies a PE multiple of 15x on FY24E EPS of 242/-.
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