Bajaj Auto Ltd’s weak performance in the export markets has been a pain point for investors in the stock. What’s more, the tough journey is likely to continue for some time with the automaker announcing production cuts. according to a Economic Times The report expects Bajaj Auto to cut production of two-wheelers and three-wheelers by up to 25 per cent. No wonder the automaker’s shares fell 5.5% on Monday, on a day when the Nifty 50 index was down 0.4%.
Bajaj has the capacity to manufacture 550,000 units per month. Production is expected to be 250,000-270,000 units in March as compared to a monthly average production of 338,000 units for the nine months ended December.
It is inspired by the difficulties that one of Bajaj’s major export markets – Nigeria is facing due to demonetisation and political uncertainty in the country. Also, Bajaj’s other export markets are under pressure due to non-availability of dollar and devaluation of local currencies.
Note that exports form a large portion of Bajaj’s total volume, even though the share has dropped over time due to weakness in demand. Export volume share in January was 39% as against 67% in April. Lower export volumes also impacted Bajaj’s overall volumes, which fell 9% year-on-year (YoY) in FY23 so far (till January).
Decrease in export volumes does not bode well for margins as it is a high-margin business. Besides, there’s another constraint on the automaker’s margins. Production cuts will pull down the capacity utilization rate below 50%, according to Economic Times Report. Given the lower production at the same level of fixed costs, this will impact Bajaj’s margin performance.
“This production cut will lead to a reduction in FY24 earnings estimates for Bajaj Auto by at least 4-5%,” said Varun Baxi, an analyst at Nirmal Bang Equities.
It is true that moderation in commodity prices will provide some support to Bajaj’s margins. Lower cost of raw materials such as steel, aluminum and noble metals helped drive a 184 basis points sequential increase in operating profit margin to 19.1% in the December quarter. One basis point is 0.01%.
To be sure, a muted domestic demand environment is another concern. Bajaj’s wholesale volumes are expected to decline year-on-year in February. Pick up in demand both on the domestic and export market front remains key to lifting sentiments for the stock, which is down about 12% from its 52-week high. 4,131.75. Bloomberg data shows that shares are trading at 15.4 times estimated earnings for FY24.
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