Bajaj Auto: Partial Sell Note
23-01-2024

We had given a buy call in Bajaj Auto on 22 March 2022 at Rs. 3,656. It has almost doubled since then. In this period, the things that have developed positively for Bajaj Auto are:

1. Improved Operating margins: Operating margins for Bajaj Auto were hovering around the range of 16-18% from the past 4 years, however in FY23, the company delivered an operating margin of 19% and 20% in Q2FY24. This improvement was aided by reducing raw material costs and higher sales volume led operating leverage benefits.
2. Revised Dividend Policy: The Company in Oct 2023 revised its dividend policy wherein it would distribute more than 70% of its profits if its surplus funds are over Rs. 15,000 Cr. Investors getting clarity of this payout via dividend and buyback was a significant reason for the run-up in the stock.

Future triggers:

Going forward, we see the following triggers playing out positively:

1. Exports have been sluggish recently due to weak macroeconomic conditions, especially in developing countries. We expect a gradual improvement in export volume in the coming year.
2. Chetak is an established brand in the Indian EV space and market share gain in this segment should bode well for the company.
3. Bajaj has made several new launches in the Premium segment; this along with the Ramp-up of Triumph distribution network (targeted capacity of about 10,000 units per month by the end of the year) shall provide further growth for the company.

Buy-back Update: 

The company recently announced a Buyback worth Rs. 4,000 Cr at the price of Rs. 10,000 per share. Currently, the company has an investments + Cash balance of more than Rs. 18,500 Cr, and the buyback amounts to less than 25% of the company’s surplus funds. The company should find venues to invest this capital at a high ROE else it should be distributed back to the shareholders. Buyback is done at a significant premium to the current market price, but the buyback size is not very large and thus the acceptance ratio would range between 4-10% for retail shareholders (investors holding shares worth less than Rs. 2 Lakh). For HNIs, this number would be much lower at 1-2%. Also, the buyback process would take 1-2 months, holding all shared till then would be risky. 

Moneyworks4me Opinion 

We should understand that Bajaj Auto due to its high market share in the Indian as well as export markets is a steady compounder of capital and not a high-growth stock. Therefore, after getting decent returns in a short period, we should redeploy funds in better opportunities so that the overall CAGR for the portfolio increases. Fundamentals have not declined for the company but the price you pay today determines your future returns and incremental returns look moderate at this valuation.