Bajaj Auto Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Resilient quarter despite weak domestic demand: Q4 EBITDA margin improved 120 bps QoQ to 17.5%, driven by a favorable export mix, superior product performance, and price increases slightly ahead of material costs.
• Export engine remains the profit driver: Export volumes stayed above 200,000 units per month, with market share gains of ~2% across all regions and the sports brand mix hitting its highest level, boosting ASPs by 11% QoQ.
• Domestic motorcycle demand is structurally weak: FY2022 was the industry's lowest year in a decade, signaling that the core two-wheeler customer has not recovered from economic hardship and cost increases continue to retard demand.
• Chip shortage will hurt Q1 before a Q2 recovery: A 15–20% shortfall in semiconductor supply will cause a temporary loss of domestic market share in Q1, but management expects the issue to resolve by July as alternative sources come online.
• What to watch next quarter: Whether the marriage season provides a genuine demand signal or just a blip, the pace of chip shortage resolution, and how much of the ~3.5% commodity cost headwind can be passed on in a fragile demand environment.

Export Business: The Profit Engine

• Volume momentum: Exports remained strong and steady almost every month of FY2022, with volumes over 200,000 units per month, and management expects to continue at this pace while delivering double-digit growth in FY2023.
• Market share gains: Bajaj Auto grew market share by ~2% points across all regions (LATAM, Africa, South Asia, Middle East, ASEAN), driven by strong brand positioning and channel strength.
• Competitive position: Over 80% of export revenue comes from markets where Bajaj holds the number one or number two position, a leading indicator of its ability to harvest post-pandemic demand recovery.
• Sports brand mix shift: The share of Pulsar and Dominar in the export portfolio increased quarter-on-quarter to its highest level, driving an 11% QoQ ASP increase for export motorcycles and strengthening the corporate brand.
• Dominar order book: The Dominar order book is already unserviceable in the next couple of months, with customers responding well to upgrading to the 250cc class, mirroring the Pulsar 200NS play from years ago and boding well for the bottomline.
• Supply chain drag: Q4 export performance was compromised by supply chain issues; otherwise volumes would have been at least 5% higher.
• Shipment vs. retail base effect: Reported export shipments appear flat or negative YoY because last year shipments ran ahead of retail as distributors rebuilt stocks; current retail is at its highest-ever levels with double-digit growth, and this gap should iron out in a few months.
• Egypt disruption: A three-wheeler import ban in Egypt has created a gap, but the government is working on a solution and management expects business to return in three to six months.
• Five-year ambition: Bajaj Auto aims to double its international business from two years ago, largely by deepening share in existing markets and to some extent entering new markets like Brazil, Europe, and ASEAN.

Rakesh Sharma: "Over 80%, in fact close to 85%, of our revenue continues to come from markets where we are holding number one or number two positions. This is a very important point because it is a leading indicator about how we will be able to continue to harvest the post-pandemic return in each of these markets."

Domestic Motorcycles: Structural Weakness and a Chip Headwind

• Demand collapse: FY2022 was the lowest year for the two-wheeler industry in a decade, with Q4 industry registrations declining 12% YoY, signaling that the core customer has not recovered from economic hardship and cost increases from inputs and regulatory requirements continue to retard demand.
• Market share gain despite weakness: Bajaj Auto fared slightly better than the industry, gaining retail market share from 18% to ~20% (VAHAN) because new product introductions were very well accepted.
• Pulsar 250 Twins: Received an outstanding reception, enabling share gain in the subsegment and expanding the segment itself.
• CT 110: Improved portfolio quality in the entry commuter segment, showing good resilience despite price increases and forging a unique position based on style and design, boosting profitability in that segment.
• NS125: The most expensive 125cc in its segment (~22% more expensive than the average 125cc bike) is doing extremely well, now representing 45% of Bajaj's 125cc portfolio, with strong appeal to youthful buyers (60% below 25 years).
• Chip shortage impact: A 15–20% shortfall in semiconductor supply will impact mostly the domestic business, with CT and Platina volumes already dropping significantly because chips were consciously prioritized toward higher-profitability products and geographies.
• Temporary share loss expected: The chip shortage will lead to a temporary loss of market share in Q1, but management expects a rapid recovery in Q2 when counter-measures on broad-basing the supply chain are in full play, with the issue resolved by July onward.
• Product pipeline waiting: A stream of products is waiting for the supply chain to stabilize, including a couple of launches in the 125cc segment.
• Upgrade strategy: R&D is working on moving 100cc customers into 125cc and moving customers within segments to higher-priced variants, with a play at the entry point of 125cc to upgrade 100cc customers coming from Bajaj Auto at an undisclosed time.

Rakesh Sharma: "FY2022 has been the lowest year for the two wheeler industry in a decade and for sure this is signaling two things. The two wheeler customer representing the relatively weaker section of the society has not recovered from the economic hardships and the cost increases on account of inputs and other regulatory requirements continued to retard the demand recovery."

Three-Wheelers: Dominance and an EV Inflection

• Domestic recovery: Three-wheeler retail sales continued to improve as economic activity returned to normalcy, with sales over 52,000 units, up 15% YoY, and retail market share close to 70%, the highest ever.
• Segment leadership: Bajaj Auto holds leadership in every segment (passenger/cargo, large/small format, CNG/otherwise), with traffic at 92–95% and expected to cross 100% in a few quarters.
• CNG transition: CNG's share of the three-wheeler industry moved from 24% to 62%, with Bajaj's CNG market share at 77%, driven by cost economics favoring CNG vs. diesel and government focus on CNG penetration.
• Auto finance enabler: Unflinching support from auto finance partners was a key enabler for the three-wheeler business outperformance.
• Electric three-wheeler launch: Bajaj Auto will launch an electric three-wheeler in a limited way by end of this quarter (probably June), in a couple of cities only, then observe for three months before expanding, following a playbook similar to Chetak.
• TCO dynamics: Currently, the total cost of ownership for electric three-wheelers is almost at parity with CNG, but a major CNG price increase is expected in coming months, while cell cost reduction has not materialized this year (costs are back to ~2019 levels).
• Long-term cannibalization: Over 3–5 years, if cell cost reduction resumes, electric three-wheelers will start to cannibalize CNG, and lithium-ion e-autos will start to eclipse lead-acid e-ricks, which management calls "a very jugaad solution" that cannot withstand a superior product.

Rakesh Sharma: "e-ricks are 'a very jugaad solution' and so they will not be able to withstand a superior product."

Margins: A Q4 Tailwind, a Q1 Headwind

• Q4 EBITDA walk: Underlying EBITDA margin of 16.8% improved 120 bps QoQ, driven by a mix favoring exports (60% of volumes vs. 55% in Q3, with exports enjoying better profitability), superior performance of better-margin products, and a net positive impact from price increases slightly ahead of material cost increases.
• ASP boost: ASPs were up ~7% QoQ, with export motorcycle ASPs up 11% QoQ, driven by the increasing contribution of Pulsar and Dominar.
• Deferred cost benefit: Q4 benefited from the deferral of negotiated raw material cost increases into Q1, as the team pushed out inflation that was anticipated; management declined to quantify the impact, giving only a directional sense.
• Employee cost tailwind: Q4 employee benefit expenses fell to ₹305 Cr from ₹339 Cr QoQ because of a ~₹30 Cr benefit from year-end actuarial valuation of employee benefits.
• PSI incentive: ₹30 Cr was booked in Q4 (₹8 Cr for Q4, ₹22 Cr for 9M FY22) after receiving the eligibility certificate for Maharashtra's Package Scheme of Incentive for the Waluj plant, with an additional ₹315 Cr booked as an exceptional item for prior years 2015–2021.
• Q1 cost headwind: Management expects a ~3.5% increase on costs mainly from metals, with only about one-third recovered so far through the ~1.5–2% price increase taken on April 1, 2022.
• Margin outlook is uncertain: Positive factors include continued export growth, portfolio improvement, and the return of the three-wheeler business; negative factors include the arithmetic pressure from a rising domestic motorcycle mix and real cost increases. If demand recovers, the industry can pass on cost increases; if not, the approach will be more circumspect.
• Full-year margin view: Holding margins at current levels by year-end would be a very good performance but challenging; management cannot give even a band.

Rakesh Sharma: "I would say that we will take it quarter-by-quarter. There are positive but there are downward pressures and if by the end of the year we are able to hold down to this, it will be a very, very good performance but it will be challenging. I unfortunately cannot give you even a band at this point of time."

EV Strategy: Building Before Scaling

• Phased approach: Management believes it is in a "build phase" preceding the scale phase, reprioritizing certainty and safety over speed, with three objectives: build a dependable brand on product performance and customer experience, build deep capabilities in R&D and supply chain, and build a portfolio across personal/business, low speed/high speed, two-wheelers/three-wheelers, and fixed/swappable battery systems.
• Chetak expansion: Added 12 cities in Q4 (including Delhi, Mumbai, Surat), bringing the total to 20 cities, though the ramp-up is hindered by a semiconductor shortage with a 6–9 month waiting period.
• 18-month capability build: The next 18 months or so will be guided by building capability, after which the company aims to scale up and aspire for leadership globally.
• Customer experience focus: A two-year project completed with dealerships has put over 1,000 dealerships under an NPS system, improving customer experience at showrooms and service centers, with further work planned to redefine processes and lift culture.

Rakesh Sharma: "EV is a nascent segment, and we are keen to see the responsible development of this category. It is a great opportunity for Bajaj Auto at a global level and we are very optimistic about its growth. However, we believe we are in a built phase, which precedes the scale phase..."

Guidance & Commitments

Key Metrics