Bajaj Auto Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record quarter despite export shock: Revenue crossed INR 10,000 crores for the first time, with margins expanding as improved dollar realization and operating leverage offset an adverse mix.
• Export volumes deliberately cut to protect the channel: Management slashed shipments after spotting a dramatic retail fall driven by USD strength and dollar shortages, bringing distributor stock to manageable levels; the adjustment is now complete.
• Domestic motorcycle business roared back: Volumes nearly doubled sequentially to over 620,000 units as a new ECU vendor restored supply, allowing a rebuild of channel inventory and a retail market share recovery to ~18% by September.
• The 125cc+ shift is a structural margin driver: The entry commuter segment is declining while 125cc+ grows; Bajaj’s portfolio mix in this bracket has moved from 46% to 60% since FY20, improving profitability and competitive position.
• What to watch next quarter: Whether the nascent export retail recovery in Africa and LATAM translates into higher Q3 shipments, the pace of Chetak’s volume ramp with better supply visibility, and how much of the softening commodity complex flows through to margins.

Export Downturn & Recovery

• Root cause was macro, not demand destruction: Sharp USD appreciation caused severe double-digit currency devaluation in most overseas markets, raising retail prices, while extremely poor USD availability for trade choked transactions; the impact was most severe in South Asia, the Middle East and Africa, less so in LATAM and ASEAN.
• Channel stock deliberately corrected: Management spotted the retail fall around April/May and cut exports to bring distributor stock and exposure down; the adjustment was completed in Q2, so shipments and retail are now well matched, and Q3 exports are expected to be better than Q2.
• Mix softened the revenue blow: Export volumes fell ~20% but revenues declined only ~10-11% because fewer low-end commuter bikes were shipped to stressed African markets and more commercial vehicles were sold, aiding the mix.
• ASEAN was the bright spot: The Philippines industry revived to pre-COVID levels and Bajaj registered its highest ever Q2 sales there, emerging as the clear leader in ASEAN; demand improved on pent-up COVID emergence, though growth is expected to temper.
• Africa showing early signs of improvement: The demand decline eased from almost minus 20% to minus 10% on a like-to-like period basis; LATAM is also easing slightly.
• Pricing will not be used to fight macro devaluation: Management called international business “not for the faint hearted” and said even shaving a few percentage points off margins cannot offset a 20% currency devaluation; pricing will only be deployed for competitive issues or promotions, not to absorb macro-led shocks.

Rakesh Sharma: "International business is not for the faint hearted. Argentina, Egypt and all have experienced serious devaluations, and there's a mechanism in the company, which comes into play. But by shaving off the price, we can deal with this massive devaluation, so that's not the way we are going to approach it."

Domestic Motorcycle: Supply Restoration & Market Share

• ECU supply restored to near-normal: A substantive five-month R&D and supply chain effort to broad-base vendors for critical components is complete, with supplies resuming to almost 98% levels; remnant issues in top-end models and some 3-wheelers were to be resolved within October.
• Volume and share snapped back: With supply easing, domestic motorcycle volumes almost doubled sequentially to over 620,000 units; retail market share, which had fallen to 14-15% during the supply crunch, climbed back to 18% by September per VAHAN data, with early October touching 19%.
• Channel restocked ahead of festive: The company entered the festive season with about five weeks of inventory across dealerships, positioning for strong execution through the rest of the season.
• The 125cc+ structural shift is the core profit story: The entry commuter (cheaper 100cc) segment is declining sharply, particularly in rural areas, while the 125cc+ segment is growing and has reshaped the industry since FY20; Bajaj’s domestic motorcycle portfolio is now 60% in 125cc+ versus 46% in FY20, a key driver of improved profitability and superior competitive position.
• New Pulsar platform gaining traction: The N160 launched to outstanding reception and gained market share in early-launch states; combined with better supply, it helped gain substantial share across the country, and the platform will be expanded further in coming quarters to substantively upgrade the entire Pulsar portfolio.
• Strategy is upgrade-led, not price-led: The central theme is to leverage innovation to cause the market to upgrade (kick start to electric start, 100cc to 125cc, 125cc to 150cc, non-ABS to ABS); management is not chasing market share at the expense of profitability, and uses pricing or promotions only as a bridge where a product solution does not yet exist.

Rakesh Sharma: "The central theme and central plan of our strategy is to leverage innovation and cause the market to upgrade."

Commercial Vehicles & Electric

• CV market share at an all-time high: Volumes ramped up on improved supply, dealer inventory was restored, and retail improved to 65% of pre-COVID levels; market share reached 72%.
• CNG penetration is a durable advantage: Industry CNG penetration hit its highest-ever 67%, and Bajaj’s market share in CNG products was almost 80% in Q2, driven by the government’s continuous rollout of the CNG network and the company’s ability to capitalize.
• Chetak volumes grew over 50% QoQ to almost 10,000 units, with presence gradually increased to 40 cities; supply chain visibility is much better now, and Q3 is expected to be a lot better than Q2.
• Chetak ramp is calibrated to supply certainty: Management will not ask dealers to invest in new networks until volume certitude is clearer, so network expansion has been paced to supply chain visibility; 3 or 4 new product introductions are planned under the Chetak umbrella over the next ~18 months, attacking new segments.
• Electric 3-wheeler launch is deliberate, not rushed: Trials are continuing across markets and are expected to complete by the calendar year-end, with a commercial launch aimed before the financial year closes; management wants a near-perfect product because the brand has strong credibility with auto users and they do not want to spoil it.

Rakesh Sharma: "We want to come with a product which is near perfect rather than go with something which is not and try to improve it on the run. We have chosen the path of going back and devoting our product to -- because we've got very, very good engagement levels in the auto. We've got a very good brand credibility. We do not want to go there and spoil the brand name."

Margins: Expansion Drivers & Outlook

• Price vs cost was neutral: Material inflation came in at the lower band of the anticipated range, and the impact was almost entirely neutralized by pricing taken early in the quarter.
• Operating leverage and dollar realization did the work: Higher revenues made up for an adverse enterprise-level mix (lower exports, higher domestic, and within domestic a significant rebuild of the entry commuter segment), while improved rupee realization at almost INR 80 per dollar, a 3% sequential improvement, flowed straight into margins.
• Other operating income got a one-time bump from better realization on export incentive scripts (MEIS) that were sold or traded as they neared expiry, at a higher realization than the preceding quarter.
• Commodity tailwinds are emerging: Deflation is likely happening across the board, led by the metals complex; exceptions showing inflationary trends are electricals, plastics, polypropylene and maybe rubber, but the direction of the trend is one of easing.
• No cost-recovery pricing needed now: Given the commodity context, management sees no need to price out to recover cost at this stage; any pricing actions would be opportunistic rather than defensive.
• Rupee depreciation is an additional tailwind: The rupee has since moved past INR 82 to the dollar, which should help the case for better realizations and margins looking ahead.

Dinesh Thapar: "And therefore, with price versus cost being neutral and operating leverage on the back of higher revenues making up for a little bit of the adverse mix that we saw, the improved dollar realization has meant that, that flew straight into margins."

Guidance & Commitments

Key Metrics