Bajaj Auto Drops 10% on Disappointing Q2 Results: What’s Behind the Decline?

Shares of Bajaj Auto continued their decline, falling by more than 10% to ₹10,414 during morning trade on 17 October. This drop came after the company posted a lower than expected net profit for the second quarter of FY2024-25 and revised its growth outlook for two wheeler sales in India.

Q2 Financial Performance Falls Short

For the second quarter, Bajaj Auto reported a 9% rise in standalone net profit to ₹2,005 crore, missing analyst’s expectations. This compares to a net profit of ₹1,836 crore in the same quarter last year.

Revenue for the July-September period saw a 22% increase rising to ₹13,127 crore up from ₹10,777 crore in the previous year. Despite the growth, the company's performance did not meet market expectations leading to a selloff in its shares.

Bajaj Auto has also revised its growth outlook for two wheeler sales in India setting a modest target of 5% which is at the lower end of its earlier estimate of 5-8%. This cautious outlook has added to the pressure on the company's stock price.

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Brokerage Reactions: Mixed Sentiment

Citi: Sell with a 33% Downside

Citi has issued a sell rating for Bajaj Auto with a target price of ₹7,800 per share suggesting a 33% downside from its last closing price of ₹ 11,616. According to Citi the company's Q2 performance was slightly below expectations due to a small miss in average selling prices (ASPs) and gross margins. The brokerage also noted a muted festive demand outlook though Vahan data showed a 12% year on year increase in vehicle registrations.

Macquarie: Neutral Stance

Macquarie maintains a neutral rating with a target price of ₹11,200. The brokerage found the Q2 performance to be in line with expectations but gross margins were weaker due to the introduction of new products. Macquarie also expressed disappointment over a lackluster festive demand outlook.

HSBC: Bullish with ₹14,000 Target

Despite the challenges, HSBC remains bullish on Bajaj Auto setting a target price of ₹14,000. HSBC believes Bajaj is catching up particularly in the three wheeler EV segment where the company has achieved 20% penetration. The bank also cited favorable regulations and subsidies driving EV growth and it expects e-rickshaw formalization to be a key growth driver.

Jefferies: Optimistic on Export Recovery

Jefferies has a buy recommendation on Bajaj Auto projecting a 14% volume CAGR over FY24-27 driven by rising domestic two wheeler demand and a recovery in exports. The brokerage highlights that the company is expanding in electric two wheelers (e-2Ws) increasing CNG bike volumes and ramping up capacity in Brazil.

Morgan Stanley: Positive on Margins

Morgan Stanley also maintains an overweight rating focusing on Bajaj’s ability to maintain margins. While the rise of electric vehicles (EVs) could affect the product mix, Morgan Stanley remains confident about the company's long term growth prospects.

International Performance & Expansion Plans

Bajaj Auto reported a 20% year on year growth in its Latin American (LATAM) markets during Q2, although its African markets saw a decline. The company is optimistic about a stronger export performance in Q3 expecting improvements compared to Q2.

Looking ahead, Bajaj is expanding its footprint in Brazil. The company plans to ramp up its production capacity in Manaus from 20,000 to 35,000 units annually by 2024. This expansion is backed by a ₹84 crore investment into its Brazilian subsidiary, Bajaj Do Brasil Comercio De Motocicletas Ltda.

Conclusion

Bajaj Auto shares have rallied 70% since the start of the year. However the recent underperformance in Q2 and the downward revision in its growth outlook have caused a sharp drop in the stock price. While some brokerages remain cautious others are optimistic about the company's future growth prospects particularly in the EV and export markets.