Bajaj Auto Q4 tailwinds about to subside –

This was largely due to a favorable product mix, which also led to a 215 basis point year-over-year increase in operating margin to 19.3%. The share of high-margin three-wheelers and parts increased in the fourth quarter. There was also an increase in the mix of premium vehicles in the domestic market.

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But one swallow does not make a summer. The lever for a richer product mix seen in the fourth quarter may not be available in the future. “We believe that once volumes pick up, even the current favorable mix will normalize,” analysts at HDFC Securities said in an April 26 report.

Take, for example, export markets. In an earnings call, Bajaj management said the impact on Nigeria from unrest related to elections and demonetization was severe in February, weighing heavily on demand. But after the election, demand picked up in March, and in April, demand looks even better, management said.

Retail sales in other export markets were slightly better in the fourth quarter on a sequential basis. According to management, this indicates that the weakness in demand that began at the beginning of fiscal year 23 has bottomed out. Note that the export volume share stood at 46% in FY23 versus 58% in FY22. While there is some respite in the outlook for export markets, the lack of availability of dollars is still a concern. In this context, Bajaj’s large presence in export markets compared to its peers puts it at a disadvantage.

Coming to the domestic market, Bajaj expects the premiumization trend to drive industry growth of 6% to 8% in the coming quarters. In the entry level segment, Bajaj is focusing on Platina 110ABS. But here, it faces increasing competition from the recently launched Honda Shine 100. To be sure, Bajaj’s motorcycle market share fell 90 basis points yoy in FY23 to 17.3%, say Jefferies analysts. India. “The upcoming launch of new motorcycles, co-developed with British motorcycle manufacturer Triumph, could increase volumes and market share in premium motorcycles,” they added.

As far as the electric vehicle (EV) segment is concerned, Bajaj is aiming to expand its presence in FY24. The restructured EV supply chain would ensure the availability of 10,000 electric Chetak scooters per month starting in June. In the three-wheeler segment, Bajaj plans to do a limited launch of passenger and cargo electric three-wheelers later this month. While this bodes well given the shift in the industry towards sustainable options, an increasing share of EVs would dilute margins, at least in the short term. In addition, the margin has other pressures. The raw material basket is a mixed bag. Some commodities, such as aluminum, copper, and nickel, are experiencing rising costs. On the other hand, the costs of inputs such as rubber, electrical parts, polypropylene and foam are softening. Incremental inflation from the increase in input costs and the transition to new standards is around 1.5%. Bajaj has gone on a price hike to cover two-thirds of that cost. Now, factoring in a higher average sales price, analysts have raised Bajaj’s fiscal 24/25 earnings estimates. But given the uncertainties, analysts remain cautious. Nonetheless, Bajaj Auto shares are up almost 19% in 2023 so far, but the road ahead may not be smooth. “After the recent rally, we believe that most of the positives are already being factored into the current market price,” the Kotak report said.

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