Seeing a sharp fall in demand after Nov; will invest Rs 650 cr in a new plant at Chakan, says Bajaj Auto.

Seeing a sharp fall in demand after Nov; will invest Rs 650 cr in a new plant at Chakan, says Bajaj Auto.

Update on the Indian Equity Market:
On Monday, Nifty ended 0.9% higher at 13,873 supported by the metal & financial stocks. The top gainers for Nifty 50 were JSW Steel (+5.8%), Tata Motors (+5.6%), and SBI (+3.3%) while the losing stocks for the day HUL (-0.5%), Sun Pharma (-0.5%), and Cipla (-0.4%). Top gaining sectors were PSU Bank (+2.7%), Realty (+2.6%), and Metal (+2.6%) while Pharma (-0.3%) was the only losing sector for the day.

Edited excerpts of an interview with Mr Rajiv Bajaj, MD, Bajaj Auto dated 24th December 2020 from CNBCTV18:

The demand in the auto sector is back to last year levels which are not a good sign. Mr Bajaj also sees a sharp fall in demand after November although he expects December 2020 sales to be slightly higher on YoY.
Things have panned out as Mr Bajaj thought they would which is that there has been a demand peak as is the case every year around the festive time.

According to him, what the company has recorded in October and November has been good because of the festive season. In December last year, the company did a total of 335,000 units roughly between domestic and exports. He thinks the Company will be a little ahead of that in December 2020.

According to him, on the domestic front, the Company will be on par with last year for motorcycles. The Company has almost doubled the EBITDA of the domestic motorcycle portfolio, which has been positive for them.

Bajaj Auto has a 90% market share in the three-wheeler market primarily in major metros.

In terms of exports, Mr Bajaj mentioned that the reason the overall numbers will be in-line with or a bit better than last year is that exports have been going like gangbusters. Demand seen is good.

On the product front, the Company has a huge task before them for the next 24 months which is
a) to renew their entire motorcycle portfolio especially on the premium brands,
b) There is a humongous amount of work to do on the EV front.

On the market front, Bajaj Auto has to continue to push to improve domestic share and having consistently now been at over 200,000 units exported every month their next goal has to be to move from 2 million exports to 3 million exports on an annual basis. For that, they need to successfully and effectively enter the Brazilian market.

Talking about the new manufacturing facility at Chakan, he said that the Company has signed up for a second plant in Chakan. The new plant was in the works for some time. This is for the expansion in premium motorcycles KTM Husqvarna, and the introduction of Triumph. Bajaj Auto may also expand the electric vehicle portfolio in the new facility.

The Company will be building this plant for a total capacity of a million units to start with. They have estimated an investment of about Rs 650 crore and perhaps the employment of a little over 2,000 people.
On the partnership front, the Company’s goal with KTM Husqvarna is to almost double the business soon.

In terms of production-linked incentive (PLI), Mr Bajaj said that it would be very beneficial to a company like Bajaj Auto. From the Merchandise Exports from India Scheme (MEIS), the Company had a benefit of 2% on exports.

Consensus Estimate: (Source: market screener website)
The closing price of Bajaj Auto Ltd was ₹ 3,420/- as of 28-December-2020. It traded at 22.8x/ 18.8x/16.5x the consensus EPS estimate of ₹ 149/180/206 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 3,316/- implies a PE multiple of 16.1x on FY23E EPS of ₹ 206/.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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