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For Bajaj Auto Ltd, 2022 has been a rocky road. Firstly, domestic demand for two-wheelers (2W) has been weak, with rural markets yet to catch up. Secondly, in recent months, the performance of export volumes has been nothing to write home about, adding to the automaker’s woes. Note that in the first half of calendar year 2022 (H1CY22), strong export markets were one saving grace for the company, given the weakness in domestic markets. In short, investors in the Bajaj Auto stock have both domestic and export worries.

In November, Bajaj’s 2W export volumes fell by over 28% year-on-year (y-o-y) to 138,630 units. This marked the fifth consecutive time of y-o-y drop in export volumes. Within overall 2W volumes, the share of exports stood at 52.9%. In H1CY22, the volume share of exports in Bajaj’s 2Ws was in the range of 58-67%.

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Of course, dull export markets had a negative bearing on peers as well. Export volumes of TVS Motor Co. Ltd and Hero MotoCorp Ltd fell by about 12% and 46% y-o-y, respectively, last month. However, Bajaj’s earnings are likely to be the most impacted here. This is because the export business is a high-margin one, and Bajaj derives a large portion of its volumes from this segment. For perspective, in FY22, exports formed about 57% of Bajaj’s total 2W volumes. This compares to around 35% for TVS and 6% for Hero. In FY23 year-to-date (till November), Bajaj’s 2W export volume share stands at nearly 49% versus 28% for TVS and 3.4% for Hero. Emkay Global Financial Services Ltd expects Bajaj’s 2W export volumes to drop by 14% y-o-y in FY23 after clocking a 22% growth in FY22.

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For Indian 2W auto companies, the key export markets are emerging economies such as Africa, the Middle East and South Asia. The downturn in many export markets can be primarily attributed to the appreciation of the US dollar that has led to a devaluation of local currencies, poor availability of dollars for trade and regulatory restrictions.

The silver lining is that the worst could be over. “The 2W export volumes in the recent months are a reflection of a worst-case demand environment. Hereon, we expect volumes to improve steadily unless an incrementally adverse factor plays out," said Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities India. Further, most of the Indian 2W companies do not export to Europe, where the slowdown is far more prominent, added Rakesh.

Indeed, it is comforting that Bajaj Auto’s export volumes have risen sequentially for the past three months continuously. Needless to say, sustained acceleration in export volumes would boost sentiments for the Bajaj stock, which is nearly 11% below its 52-week high seen on 1 September. Still, investors looking for a meaningful outperformance in Bajaj Auto’s shares in the near-to-medium term could be disappointed.

“Sustainability of domestic 2W demand recovery seen in the September quarter (Q2FY23) is questionable with the entry-level demand still being under pressure and Bajaj’s market share loss (about 300 basis points since FY20). Competitive intensity in the >125cc segment, chip supply issues and demand uncertainties in the export markets does not bode well for Bajaj Auto," said Mansi Lall, an analyst at Prabhudas Lilladher. One basis point is 0.01%.

To be sure, Bajaj’s good profit margin performance and better realizations in Q2 prompted some analysts to upgrade their earnings estimates. Improving margin outlook thanks to softening commodity costs is a boon for all auto companies, including Bajaj. Given this backdrop, all the stock now needs is a strong rebound in demand, which is not yet on a smooth path.

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ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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