Bajaj Auto is is expected to cut motorcycle and three-wheeler production by up to 25% across its export-focused plants next month, reflecting uncertainty in its largest market, Nigeria. Bajaj’s export volumes is set to decline in FY24 as well and see positive growth only in FY25. While volumes may bottom out soon, recovery may be slow as most key export markets have macroeconomic headwinds. We retain Buy and Rs 4,200 TP; valuations are reasonable (14-15x FY25e EPS) and domestic business has a favourable base.
Exports—expect gradual recovery: Bajaj’s exports are nearly at a decade low. Management has suggested a likely pick-up from May/June. We think exports should bottom out in the near term, but a recovery may take some time.
We discuss macro views from our economics teams of Bajaj’s key export markets, including Nigeria, Colombia, Philippines and Brazil, below. Almost every market is seeing macro headwinds, and although the extent varies, the reasons are similar and sticky. In Nigeria, inflation and unemployment headwinds are adverse and, unless the government is able to bring back oil production, a macro recovery is likely to be protracted. Some African countries like Ghana are in an even worse shape. Countries like Colombia and Brazil are expected to see a deterioration in macro activity in 2023, while the Philippines is struggling with sticky inflation.
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So, overall, we expect a decline in export volumes in FY24 as well. On the positive side, the long-term outlook is unchanged as most of these markets are underpenetrated and should grow from FY25 onwards. Separately, domestic volumes are growing well now, although admittedly on a low base. Still we expect a consistent improvement in domestic volumes (both 2Ws and 3Ws) in the coming quarters. On our new estimates, the stock is trading at a reasonable c14-15x FY25e EPS, and hence we retain our Buy rating.