Bajaj Auto: JP Morgan sees 15% upside with exports bottoming out, rising margins

Bajaj Auto has nearly 15 percent upside, according to JP Morgan, led by domestic and export demand recovery, rise in electric-vehicle (EV) volumes, and improving margins.

The brokerage has set a target price of Rs 4,400 on the stock, which was trading at Rs 3,828.6 at 12noon, on the BSE, on March 29. It has set the target price based on a one-year forward P/E of 16x, which is below the five-year average, and has maintained its ‘overweight’ call on Bajaj Auto.

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“Our positive stance on BJAUT is driven by expectations of: (a) likely bottoming of exports (more than 50 percent of EBITDA) and potential recovery from 2QFY24; (b) domestic 2W recovery (industry still 21 percent below pre-Covid); (c) EV volume ramp up (both 2W and 3W); and (d) improving margins due to better overall mix,” the brokerage said in its latest report.

Their base case assumes a near reversion in 2W exports by FY25, but sees domestic-sales volumes of two-wheelers (2Ws) and domestic- and export-sales of three wheelers (3Ws) remaining 4-35 percent below peak.

“We forecast 2W export CAGR (FY23-25) at 12 percent, which results in FY25 volumes at 5 percent below FY22 peak. Domestic 2W volumes should grow at 7 percent CAGR which would result in FY25 being 20 percent below FY19 peak. 3W volumes (domestic + exports) should grow at 15 percent CAGR leading to domestic/export 3Ws being 5 percent/35 percent below FY19 peak,” the report said.

The analysts were also optimistic about the company’s EV push, with the launches in this vertical even leading to a re-rating of the stock. “BJAUT (Bajaj Auto) will be launching several 2W EV models in the coming quarters and has also indicated supply chain restructuring which has reduced costs and improved availability to 10K units/month. They will also launch their 3W EV by 1QFY24,” they wrote.

Also read: Why has Bajaj Auto emerged as an analysts’ favourite despite export pressures?

The analysts believe that the company’s revenue base should “allow it to grow profitably despite rising risks from electrification”. They said Bajaj Auto is showing an increasing aggression in EVs, indicating 3W EVs as well as ramp up in 2W EV volumes.