Markets
Bajaj Auto: CNG bike and exports to drive growth
Summary
- While overall exports grew at a similar rate as domestic volumes in Q1, exports to some markets fell by as much as 70%.
- The Freedom 125 CNG bike is strategically placed to tap price-conscious customers in the 125cc segment as it’s expected to cut running costs by half.
Bajaj Auto Ltd kicked off the new financial year on a good note. The 24% year-on-year growth in Ebitda to ₹2,415 crore in the June quarter (Q1FY25) beat analysts’ estimates and was primarily driven by price realisation. The two-wheeler (2W) manufacturer is expected to maintain this momentum amid a recovery in the export market and from sales of the CNG bike it launched earlier this month. Still, an inadequate pick-up in rural demand or the export market remains a risk.
Bajaj’s Q1 revenue increased by almost 16% to ₹11,930 crore, helped mainly by better realisation as the company undertook price hikes, which also helped offset the increase in raw material costs. Accordingly, Ebitda per vehicle rose to ₹21,900, up 15% year-on-year and 1.5% sequentially. With material costs accounting for more than 70% of revenue, Bajaj Auto’s ability to pass on these costs is critical to its profitability. A diversified market base across domestic sales and exports provides some stability to its revenue, although exports have been a sore spot of late. In Q1FY25, exports contributed 39% and 28% of Bajaj’s total 2W and three-wheeler (3W) volumes. While overall exports grew at a similar rate as domestic volumes in the quarter, exports to some markets fell by as much as 70%.
Management sees three growth paths
In the coming quarters, management expects three avenues to drive growth – the recently launched Freedom 125 CNG bike, the Brazil assembly plant commissioned last month, and electric vehicles (EVs). The CNG bike is strategically placed to tap price-conscious customers in the 125cc segment as it’s expected to cut running costs by half. The bike’s current production run rate is 15,000 a month and is expected to increase to 40,000 units by the end of FY25. With an addressable market of 400,000-500,000 units (geographies where CNG is available), this would still be less than 10% of the overall market. CNG bikes could also boost Bajaj Auto’s relatively low (15%) share in the under-125cc category. It also plans to launch a 100cc CNG bike.
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Management expects to beat the expected industry growth of 7-8% in FY25 thanks to its strength in the mid and premium segments. The company’s EV portfolio is seen as another growth driver and now accounts for 14% of domestic revenue (2W and 3W combined), up from 6% in Q1FY24. Growth in EVs was aided by the government’s production linked incentives (PLI) schemes, improving raw material cost economics, and supply chain restructuring that helped reduce product prices. In June, Bajaj launched a model for less than ₹1 lakh. Volumes could also get a boost from better reach. Bajaj plans to take its electric 2Ws to 1,000 stores by September from 250 stores at present. However, the electric 2W portfolio still has profitability issues even as growing volumes help cut losses.
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The company’s electric three-wheeler (E3W) portfolio is better placed, having achieved almost the same level of profitability as internal combustion engine vehicles after accounting for PLI. Bajaj is making efforts to expand the market by getting e-rickshaw users to switch to E3Ws. E-rickshaws account for 43% of the total 3W market. The company plans to invest ₹700-800 crore on a new E3W facility and related infrastructure in FY25.
Bajaj Auto’s share price has doubled to ₹9718.50 in the past year, which suggests investors are factoring in the optimism. They will keep a close eye on the response to the new CNG bike for more cues.
Also read | Freedom 125: Bajaj Auto has positioned and priced its new CNG bike perfectly
