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Margins improve on commodities tailwinds; exports pain continues

Bajaj Auto Limited (BAL) reported healthy margin performance in Q3 FY23 despite challenging environment in exports markets. Topline growth was down 8.7% qoq and 2.7% up yoy as volumes in the domestic markets were offset by sharp fall in the exports markets. The total volumes in the quarter were down 15% qoq and 17% yoy. while the realizations grew by 23% yoy and 7% qoq on better product mix (tilted towards premium segment of 2Ws and solid performance at domestic 3Ws). During the quarter, domestic motorcycles de-grew by 27% qoq and 3% yoy on weak pre and post festive demand. Exports motorcycles de-grew by 31% yoy and 1% qoq, while 3Ws fell by 47% yoy, while de-growing 26% qoq. The exports deceleration was on account of sharp depreciation in currencies in Africa v/s US$ and unavailability of US$ resulting in decline in retail demand. Also similar fate was observed in Asia and Latin America however ASEAN markets was the lone supporter. EBITDA was up by 29% yoy/19% qoq to 17.76 bn, while margins moved up by 390 bps yoy and 190 bps qoq upto 19.1%. Margins were up mainly on input costs tailwinds, dynamic cost management, favorable domestic product mix and better foreign exchange realisations. All other cost items below operating levels remaining more or less range bound, bottomline came in 23% up yoy and down by 3% qoq at ?14.9 bn. Tax rate was steady at 24% qoq.

Domestic volumes still fine; exports issue continues to drag the business

Domestic motorcycle volumes witnessed a fall of 27% growth qoq and 3% yoy. The company however started gaining the lost market share especially in the sports and executive segment of >125 cc segment. In the executive business, the success of Pulsar 125 NS and CT 125, launch of Pulsar N160 in sport segment led to winning back of some market share which was lost in Q1. In Q3, the company launched 3 variants – 1). Carbon fibre variant of Pulsar 125 cc 2). New Pulsar 150cc and 3). Platina 110cc with ABS feature. The company has gained 2% market share in retail in the >125 cc segment which has 20 models now and contributes 66% of BAL’s domestic 2W portfolio. Steady progress has being made on building EV portfolio as Chetak scooter sales jumped to 10,000 units again in the quarter flat qoq and aspires to sell 6,000 units per month from March 23 through its wide network of 800 dealers across the nation. BAL has planned a capacity of 0.5 mn EV scooters (Chetak) viewing its heartwarming response. The supply issue is not yet completely resolved but is now at a comfortable level

Domestic 3Ws reported strongest ever show as chip issue resolved for this segment and CNG demand is reaching new highs. The company’s 3W demand is now 75% of pre-covid levels with their market share reaching 76% (72% a quarter ago) which is all time high, due to CNG expansion, in which BAL has 80% (77% a quarter ago) market share. CNG now contributes 65% (62% a quarter ago) of the overall 3W industry as compared to 24% a year ago. BAL being a sole leader in the CNG segment, 3Ws will even more strongly contribute to the numbers going forward as the segment demand is yet to reach 100% of pre-covid level.

Exports contribution has considerably fallen to 44% in Q3 v/s 56% yoy. The company is observing strong traction in markets like ASEAN and Middle East. LatAm market is slightly soft, but Africa is deep into red (25-30% down). Also South Asian markets are fallen into red now. The sequential declines were observed in Africa in both 2W and 3W segments. African weakness was mainly due to huge devaluation of currencies in various countries led by the biggest oneNigeria (which is also up for elections); against US dollar and non availability of US$ leading to sharp rise in acquisition cost leading to decline in retail demand. Ban on 3Ws in Egypt is also impacting their 3W demand in exports. However, management is expecting a bounce back in Africa and other exports markets by May-June 2023 due to pent-up demand and slight easing in currency situation there. We believe new launches in exports and easing of chip issue (not seen in Africa) should provide the necessary fillip to this business. BAL has launched the Dominar in Brazil’s Sao Paaolo area which marks BAL’s entry into the biggest Latin American country. BAL shall rapidly expand its coverage across the country in FY24 as this launch has received an encouraging response over there. High demand for Pulsar 250ccc and Dominar in LatAm (21% of exports 2W demand), robustness seen in ASEAN and Philippines should also help the cause.

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