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Bajaj Auto Ltd. (BAL), the flagship company of Bajaj Group, is a two wheeler (2W) and three wheeler (3W) manufacturing company that exports to 79 countries across LatinAmerica, Southeast Asia geographical regions. BAL holds 47.99% stake in KTM AG - the global manufacturer of sports & super sports bikes. It is the world’s fourth-largest manufacturer of 2Ws and the largest manufacturer of 3Ws globally.

The company has reported the sales volume of 1.18mn, up 3.2% sequentially in Q3 FY22. While it has improved modestly, the volume has declined by 9.6% YoY on the yearly basis. Domestic motorcycle is witnessing muted demand environment and festival session was also remained dull. However, BAL gained market share of ~1.5% despite the decline in domestic two wheeler market. Export business, though doing sturdy well is likely to report an export sales volume of over 2.5mn units in FY22. On 3W front, the company has strengthen its position and now commands ~70% of share in domestic market. Successful transition to BS-VI and strong CNG promotion by the government has helped it to gain market share in the 3W segment.

Overall the domestic 2W sector has been challenging due to the Covid-19 outbreak and also because of the shortage of the chip. However BAL has performed well on the account of strong brand performance and faster recovery in the export markets. Sector outlook seems challenging due to ongoing geopolitical risks which led to increase in raw material cost and the semi conductor shortage issue. Moreover the vehicle price hike linked to the regulatory actions (like switching from BS-IV to BS-VI), is also dampening the consumer sentiments. However, we believe the company will perform better on the back of strong brand presence, reliable strategy for the domestic market (includes new launches/platforms) and focus on margins (over volume). Margin is expected to improve because of the higher exports, depreciating rupees and increase in the market share of 3Ws. Thus, we assign a “BUY” rating on the stock with a target price of Rs. 4,000 per share.

Investment rationale:

Strong performance in the exports market: The outlook for exports business remain steady and the company has managed its inventory at adequate level unlike other peers which are struggling with production issues. Exports business is now BAL’s largest business unit, accounting for over 56% of the sales volume. Q3 FY22 export sales volume was the highest this year with an average sales crossing 0.219mn vehicles per month. The company’s exports remain robust and is expected to continue to grow at a steady pace. It has increased the global market share in both 2Ws and 3Ws. During the Q3 FY22, BAL increased the price by 5%, which was higher than of its peers. So with improved market share and also the price hike we are expecting higher business from the export operations.

3W segment recovery to regain the market share: Domestic 3W business witnessed significant improvement as economic activities almost returned to normalcy in Q3. The company have sold more than 0.052mn units during Q3, which was 18% higher sequentially and 52% more than Q3 of last year. BAL achieved a whopping market share of 71%, which is a all time high mark. It is now leading in every single segment of the 3W market: small passenger, large passenger and cargo vehicle segment. In the cargo segment, the company has crossed the market share of 50%. Improvement and expansion in the CNG network continues to be strongly favored by the government. With CNG infrastructure in the city rising at robust pace, this coupled with sustaining higher fuel prices is likely to encourage 3W consumers to shift to CNG powered vehicles. Further rise in the use of CNG vehicles would be positive for the company since 75% of 3Ws are powered by CNG.

Strong focus on EV segment: The EV market has favorable government policy tailwinds. In Sept. 2021, a production-linked incentive scheme for the automotive sector was approved by Cabinet to boost the manufacturing of EVs and hydrogen fuel cell vehicles. The company has applied for the Champion OEM incentive scheme of auto PLI, pursuant to which it is planning to invest over Rs. 1,000cr in the next five years. This includes an investment of Rs. 300cr at it Akrudi plant, which has a capacity to produce 0.5mn EV vehicles per annum. During Q3 FY22, the company has sold over 2000 Chetak and had an order book of close to 10,000 vehicles. Moreover, with further evolution in the EV supply chain across the country, BAL is looking to roll out Chetak EV in 12 additional cities from the current presence in the 8 cities.

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