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Optimism on Bajaj Auto may be debatable as demand hit

 

Cogencis, Thursday, May 21

By Apoorva Choubey and Kritika Arora

MUMBAI - Bajaj Auto Ltd may have charmed the street with better-than-expected earnings for Jan-Mar on the back of strong exports, but simply extrapolating this performance to hope for similar trends in the coming quarters may be ill-conceived.

Even though several analysts have retained their "buy" rating on the stock, some market participants believe the company will not be immune to the lower demand and supply chain issues in both local and export markets.

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"In such times, the only reason for analysts to retain their positive views on any company is that they do not have enough data or commentary to justify a downgrade...," said a fund manager at a local fund house.

"In Bajaj Auto's case, favourable valuations are something that would have kept sell-side people positive," he said.

Exports--the bright spot in the company's earnings--are vulnerable to severe economic slowdown due to the coronavirus pandemic, as some key markets depend heavily on commodities, prices of which are volatile and sharply below historical averages.

This is evident from the 80% fall in export volumes in April. Bajaj Auto has indicated that retail demand in export markets is 30-35% of normal, while the depreciation of local currencies is also a threat to sales.

Though the company has said exports may do better than domestic sales and it will remain the market leader in Africa, it does not necessarily mean a revival in demand, because it is too soon to judge the impact, said analysts.

This uncertainty about the extent of damage to incomes in India too, has made some market experts question the company's sanguine expectation of a likely recovery in demand from October.

"One has to read between the lines...the hope of a steady consumption revival in H2, as signalled by many corporates, may be too optimistic...," said a portfolio manager with over 1 bln rupees in assets.

In addition, the company has itself said that domestic demand for entry-level motorcycles and three-wheelers will be the worst affected, while resolving issues in its supply chain may take at least three to four months to "disentangle."

Bajaj Auto will see lower sales of high-margin motorcycles, as the economic stress will weigh on discretionary spending and lower the demand for two-wheelers to a great extent, said IDBI Capital Markets in a report.

The economy customer will face more challenges as income losses will be deeper for that segment and availing loans will become difficult, Rakesh Sharma, executive director and chief commercial officer of Bajaj Auto, said in a conference call with analysts on Wednesday.

This essentially means that the company may take a huge knock on sales volume, as entry level motorcycles, with 75-125cc engines, make up for around 40% of domestic sales, which are 50% of total.

Bajaj Auto said the entry-level segment was seen vulnerable even before the pandemic struck as product prices had to be increased to pass on costs for transition to Bharat Stage VI norms.

Citing concerns over demand, Edelweiss Securities has cut volume estimate by 12% for the current financial year, but retained a "buy" rating because of attractive valuations.

Emkay Global Financial Services has maintained a "hold" rating, stating that demand prospects for high-margin segments are weak, including three-wheelers.

Today on the National Stock Exchange, the company's shares ended off the day's high at 2,640.35 rupees, up 3% from the previous day's close.

Of the 43 analysts tracking Bajaj Auto, 23 of them have a "buy" rating, four have an "outperform" or equivalent rating, and 12 a "hold". Three others have a "sell" recommendation and one a "reduce" rating, data on Factset Estimates showed.  End

Edited by Ashish Shirke

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