Domestic gains for Bajaj Auto, falling crude oil prices may impact exports

The Bajaj Auto stock was up 2.3 per cent in trade on expectations that strong volume growth, lower running costs of two-wheelers, and market share gains should help the company post strong revenue growth rates.

The company is the only one among the auto pack which has not seen a significant downward earnings revision for the current fiscal year after the July-September quarter results.

Led by attractive finance schemes, promotions, and pricing, the company’s volume growth in the September quarter was more than double that of the two-wheeler sector. This has helped the company gain 300 basis points (bps) market share to 21.2 per cent in the three months ended October. The company is targeting an overall motorcycle market share of 25 per cent.

What should help the company and the sector - pegged back by higher insurance cost, price hikes, and high cost of ownership - is the slide in crude oil prices.

Analysts at IIFL expect the demand scenario to improve from the current lows, as consumers adjust to the initial higher insurance costs, while running costs come down on the back of lower fuel prices.

Bajaj Auto, which has been outperforming the sector - especially in the entry level segment - should be a key beneficiary.

There are, however, two headwinds for the company. The first is on the margin front. Though the company has taken price hikes up to Rs 3,000 in two-wheelers and three-wheelers, the aggressive pricing strategy may continue to put pressure on profitability. Margins were down over 290 bps year-on-year to 16.8 per cent in the September quarter.

The other concern is whether the falling crude oil prices, which are a positive for its domestic market, could prove to be a demand deterrent in export markets such as Nigeria.

Export growth in some of its key markets has been upwards of 30 per cent. While so far there has not been any indication of sluggishness in growth, further fall in prices could slow export demand.

At the current price, the stock is at 18 times its 2018-19 estimated earnings per share. Given the diversified market share gains, a diversified product and geographic mix, investors can look at it on dips.

 


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