Bajaj Auto’s valuation gap to narrow as exports recover

ET Intelligence Group: Bajaj Auto has underperformed peers on bourses over the past six months due to a sharp drop in the sales of three wheelers as the economy came to a standstill amid a nationwide lockdown to curtail the pandemic. The stock gained 18% during the period compared with the 33-49% gains of peers. The trend may however reverse given the early signs of a recovery in the export markets and Bajaj Auto’s relatively lower valuation. The exports account for nearly half of the operating profit of the company followed by 26% contribution from the domestic two and three wheeler sales. The export volume of two and three wheelers has begun to grow since September 2020. Two wheeler export grew at a record 29% year-on-year in October followed by 18% growth in November. This was due to a recovery in African market, which contributes 53% to the export volume of the company.In addition, South Asia (excluding Sri Lanka) and Latin American have staged a smart recovery. Bajaj Auto has entered into large markets such as Brazil, Indonesia, Thailand and Vietnam to expand its export reach.High margin three-wheeler export volume too has started to improve helped by incremental volume from new markets. The monthly three-wheeler export has reached to pre-COVID level of nearly 30,000 units. As a result, the three-wheeler export dropped by just 6% to 26,510 units in November even though the volume in the existing market of Sri Lanka dropped to zero from a monthly average of 10,000 units following an export ban.New markets are likely to offset the volume loss in Sri Lanka. Analysts expect three wheeler export volume to grow by 20-25% in FY22 after a likely fall of 8-10% in the current fiscal year.In the domestic market, a recovery in the urban areas augurs well for the company’s premium bikes segment. The 125 cc Pulsar bike has received encouraging response as volume grew by 31% to 2.6 lakh units in the September quarter. The improving volume and better realization of premium bikes will aid margins in the long-term.At Wednesday’s closing price of Rs 3.337.5 on the BSE , the stock was traded at a one-year forward price-earnings multiple of 19.3. This was at 29% discount to the average peer valuation, much higher than the long-term average discount of 14%. However, the discount may narrow given the volume recovery in the export market and premium bike growth in the local market.

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