Weaker export prospects dim Bajaj Auto’s earnings outlook

Bajaj has the capacity to produce 550,000 units every month. In March, it is expected to produce 250,000-270,000 units versus a monthly average production of 338,000 units for the nine-month ended December.

This is driven by the difficulties that one of Bajaj’s key export markets – Nigeria is facing owing to demonetization and political uncertainty in the country. Also, Bajaj’s other export markets are under pressure due to unavailability of dollars and devaluation of local currencies.

Note that exports accounted for a large proportion of Bajaj’s total volumes even as the share has dropped over time due to the demand weakness. In January, export volume share was 39% versus 67% in April. Lower export volumes also weighed on Bajaj’s total volumes, which fell over 9% year-on-year (y-o-y) in FY23 so far (till January).

A reducing export volume share does not bode well for margin as this is a high-margin business. Moreover, the automaker’s margin has another headwind. The production cut would drag down the capacity utilization rate to below 50%, according to the Economic Times report. This would impact Bajaj’s margin performance given lower production at the same level of fixed costs.

“This production cut would lead to a slash in FY24 earnings estimates for Bajaj Auto to the extent of at least 4-5%,” said Varun Baxi, an analyst at Nirmal Bang Equities.

True, softening of commodity costs would give some cushion to Bajaj’s margins. Lower costs of raw materials such as steel, aluminium and noble metals helped the sequential rise of 184 basis points in the operating profit margin in the December quarter to 19.1%. One basis point is 0.01%.

To be sure, a muted domestic demand environment is another worry. Bajaj’s wholesale volumes in February are expected to drop y-o-y. A pick-up in demand on both the domestic and export market front remains crucial to lift sentiments for the stock, which is down by nearly 12% from its 52-week high of ₹4,131.75. The shares trade at 15.4 times estimated earnings for FY24, show Bloomberg data.