Bajaj Auto Shares Hit All-Time High on Strong Q2 Results. Will the Smooth Ride Continue?

Bajaj Auto's results for the September 2023 quarter reflect the sluggish demand for two-wheelers in rural areas and at the same growing premiumisation (increased sales of higher priced motorcycles) in urban areas.

Investors will be clearly hoping that with the monsoon season across the country broadly in tune with earlier years and offsetting any impact of El Nino effect, rural demand should gradually pick up in the forthcoming festival season.

The company's total vehicle sales (two-wheelers and commercial vehicles) declined 8.4% year on year (YoY) to 1,053,953 units in the second quarter of current financial year.

This comes at a time when its domestic motorcycle sales declined 18.6% YoY to 505,320 units in the quarter under review.

In contrast, commercial vehicles sales were strong in the September 2023 quarter.

In contrast in the June 2023 quarter, Bajaj Auto sold over a million units, a rise of 10% YoY basis and growth was powered by a 73% YoY rise in two-wheeler sales in the local market to 542,931 units.

Nevertheless, strong growth in sales of premium bikes like Pulsar in the September 2023 quarter helped the company's average realisations improve 14.8% YoY to Rs 1.02 lakh per vehicle.

Strong realisations helped the company's operating profit margin improve 260 basis points YoY to 19.7% in the September 2023 quarter at a time when total revenue from operations grew 6.2% to Rs 108.4 billion (bn) in the quarter under review.

Why Dalal Street is Optimistic

Bajaj Auto's quarterly results were declared after the close of Wednesday's trading and the stock ended broadly flat at Rs 5,146, and not too far from its 52-week high of Rs 5,272.

Today, the stock gained over 4.5% to touch a new high of Rs 5,393.

Nearest rival Hero MotoCorp ended Wednesday's trade at Rs 3,152 and not too far from its 52-week high of Rs 3,242.

Bajaj Auto is expected to benefit from improved sales of premium bikes like Triumph Speed 400 and the forthcoming launch of Scrambler 400X, going forward.

In financial year 2023, Bajaj Auto formed a 100% subsidiary, Chetak Technology Ltd (CTL) to tap into the thriving electric vehicle market. This subsidiary is to develop new EV technologies and products and will have its own dedicated manufacturing facility.

Their efforts to capitalise on the booming EV industry seems to be working. Bajaj Auto's domestic sales of its electric scooter Chetak (re-introduced in 2021) grew over four times in financial year 2023, from 8,187 units in financial year 2022, to 36,260 units.

On the back of this success, the company plans to extend its distribution network to over 100 cities and invest in expanding its capacity.

It also plans to invest over Rs 7.5 bn for financial year 2024, a part of which will also be spent on debottlenecking exercises to ramp-up its EV component volumes.

In addition to its strong domestic presence, Bajaj Auto also has a significant international footprint.

The stock trades at nearly 19 times estimated standalone March 2024 earnings while Hero MotoCorp trades at about 19.7 times.

Hero MotoCorp has not yet declared its September 2023 quarterly results. But the optimism is strong as shares of the company gained over 2% today.

Bajaj Auto enjoys superior operating profit margins vis-a-vis Hero MotoCorp. It has maintained its operating margins between 17-18% for the past five years (FY23 margins were 18%).

Hero MotoCorp's operating margins have ranged between 11-13% (FY23 margins were 12%).

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