Brokerages predict gradual export recovery for Bajaj Auto but some headwinds sit in the way

While brokerages anticipate a gradual export recovery for Bajaj Auto, other existing headwinds are seen derailing the company’s growth trajectory

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Bajaj Auto delivered a healthy performance in the April-June quarter, however, that didn’t seem enough for brokerages to change their stance on the automaker. Even though brokerages do expect better times for Bajaj Auto in the coming quarters, they also pointed a few headwinds that may derail the growth trajectory for the auto company.

Brokerages took notice of the signs of a recovery in exports, most anticipate it to happen gradually over the ongoing fiscal year. On the flipside, an inferior mix which resulted in a 30 basis points drop in Bajaj Auto’s EBITDA margins to 19 percent from 19.3 percent in Q4FY23 also remained a common sore point for most brokerages.

Also Read: Bajaj Auto Q1 results: Net profit rises 42% to Rs 1,665 crore; revenue up 29%

Foreign brokerage Morgan Stanley, which has an ‘overweight’ call on Bajaj Auto along with a price target of Rs 5,063 also anticipates gradual export recovery for the company. The firm also sees a scale-up of electric vehicles (EVs) and the company’s Triumph motorcycles in the domestic market as the key monitorables for Bajaj Auto. In addition, Morgan Stanley is also overweight on the two-wheeler segment where Bajaj Auto is a dominant player.

On similar grounds, domestic brokerage Motilal Oswal Financial also expects  both domestic and export volumes to recover in FY24 from the low base, which it believes will driving healthy earnings recovery for Bajaj Auto.

The firm also predicts that Bajaj Auto will benefit from market share gains over the long term, driven by the premiumization trend, opportunity in exports, and the potential sizeable position in the scooter market through EVs.

Despite that, MOFSL also highlighted that a large part of Bajaj Auto’s India profit pool (comprising premium motorcycles and three-wheelers) is vulnerable to possible disruption from electrification.

Moreover, the broking firm feels Bajaj Auto’s current stock valuation fairly reflects the expected recovery as well as the risk from EVs but its dividend yield of 4.5-5.0 percent should support the scrip. MOFSL has a ‘neutral’ stance on the Pune-based automaker, with a price target of Rs 5,150.

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On the other hand, while Nuvama Institutional Equities also ascribed to expectations of a gradual recovery but it pegged it on the economic conditions and dollar availability in African and Asian markets.

Regardless of that, the brokerage firm said it expects Bajaj Auto to underperform peers such as TVS Motors, owing to its weak presence in scooters in the domestic market and its large exposure to overseas markets.

Moreover, even though the firm chose to raise its target price for the stock by 4.5 percent to Rs 5,100 to bake in an uptick in FY24E/25E EPS by 6 percent each, higher realisations, it still retained its ‘hold’ rating.

On the other hand, Kotak Institutional Equities is concerned over the impact of rising competition in the economy motorcycle segment for Bajaj Auto. The firm believes that a rise in competitive intensity within the segment will weigh on Bajaj Auto’s entry segment portfolio.

Moreover, KIE also believes two-wheeler segment export volumes have bottomed out, but unavailability of the US dollar and currency devaluation in Nigeria remain areas of concern. “Though the company’s profitability has improved significantly in FY23 mainly owing to a richer product mix, we do not expect the current profitability to sustain, as we expect demand from Africa to recover from the second half of this fiscal and strong growth in electric 2W sales,” KIE mentioned in its report.

Aligned with MOFSL’s view, KIE also believes the current valuation of Bajaj Auto, especially after its over 13 percent gains in the past three months, factors in its upside potential. On that note, the firm retained its ‘sell’ rating for the stock, with a price target of Rs 4,350.

Amidst the dark clouds of ifs and buts around Bajaj Auto, investors also chose to remain on the sidelines. As a result, shares of the automaker did not react strongly to its earnings and at 10.08 am were trading 0.5 percent higher at Rs 4,871.94 on the NSE.

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