EV And E-2-Wheeler Focus Will Shape Future Leadership

Key Takeaways

• Strategic focus on emerging segments like EVs and CNG, coupled with expanding manufacturing capacity, aims to boost revenue and market share.
  
• Aiming for leadership in 125cc+ and e-2-wheeler segments, alongside finance company expansion, is set to enhance growth and margins.
  
• Economic fragility in African markets, commodity cost fluctuations, and intense competition in the 100cc segment threaten Bajaj Auto's profitability and market share.

Catalysts

Engages in the development, manufacture, and distribution of automobiles in India and internationally.

• Bajaj Auto's strategic focus on emerging segments such as CNG and electric vehicles (EVs), with new platforms like the Chetak and E-autos showing potential for robust growth, could drive revenue growth as these products capture a larger market share.
  
• The company's investment in expanding manufacturing capacity, particularly in the LatAm region through its new plant in Brazil, suggests that Bajaj Auto is positioning itself to capitalize on growing demand and expand its revenue.
  
• Bajaj Auto's aim to become a leader in the 125cc+ segment and in e-2-wheelers, driven by an invigorated product lineup and distribution expansion, is expected to boost both top line growth and net margins by focusing on higher-value segments.
  
• The recovery in international markets such as LatAm, combined with strategic management of foreign exchange and improvements in the U.S. dollar rate, indicates potential for enhanced revenue and EBITDA growth, surpassing volume growth.
  
• Bajaj Auto's captive finance company, with plans for national expansion, is expected to support sales growth and contribute to earnings by facilitating higher financing penetration across both 2-wheelers and 3-wheelers.

Bajaj Auto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bajaj Auto's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.7% today to 17.9% in 3 years time.
• Analysts expect earnings to reach ₹128.7 billion (and earnings per share of ₹460.58) by about December 2027, up from ₹73.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹100.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.9x on those 2027 earnings, up from 33.9x today. This future PE is greater than the current PE for the IN Auto industry at 20.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.77%, as per the Simply Wall St company report.

Bajaj Auto Future Earnings Per Share Growth

Risks

• The sustained economic fragility in certain African markets due to currency volatility and other macroeconomic issues could negatively impact Bajaj Auto's export earnings.
  
• Fluctuations and increases in commodity costs, particularly in aluminum, copper, and other metals, pose a risk to maintaining profitability and margins.
  
• The intense competitive landscape in the 100cc motorcycle segment, with heavy discounting by competitors, may continue to pressure Bajaj Auto's market share and profit margins in this segment.
  
• The upcoming OBD standards and the associated compliance costs may impact the cost structure for the company, potentially affecting net margins.
  
• Significant losses by associate company Pierer Mobility AG may continue to impact Bajaj Auto's consolidated earnings negatively if economic conditions in their operating regions do not improve.

Valuation

• The analysts have a consensus price target of ₹10981.12 for Bajaj Auto based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹14000.0, and the most bearish reporting a price target of just ₹5007.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹717.0 billion, earnings will come to ₹128.7 billion, and it would be trading on a PE ratio of 39.9x, assuming you use a discount rate of 18.8%.
• Given the current share price of ₹8956.75, the analyst's price target of ₹10981.12 is 18.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.