Bajaj Auto stock downgraded by Morgan Stanley on export exposure

Morgan Stanley downgraded Bajaj Auto Ltd (NS:BJAUT) to Underweight from Equalweight, lowering its price target to INR8,075.00 from INR9,117.00. This action reflects concerns over Bajaj Auto's limited exposure to India's domestic volume growth cycle, with 40% of volumes from exports, and significant market share losses in the domestic internal combustion engine (ICE) two-wheeler market, which has fallen to approximately 9%. The firm also cited the company's absence in the ICE scooter segment and anticipated minimal volume benefits from the recent GST reduction on three-wheelers.

Analysis

Morgan Stanley has downgraded Bajaj Auto Ltd (NS:BJAUT) to 'Underweight' from 'Equalweight', concurrently reducing its price target to INR8,075.00 from INR9,117.00. The downgrade is predicated on several fundamental concerns, primarily Bajaj's limited leverage to India's domestic volume growth, as 40% of its volumes are derived from exports. A significant factor in the revised outlook is the company's eroding market position in the domestic internal combustion engine (ICE) two-wheeler market, where its share has contracted to approximately 9%, a low point for the company outside of the Covid-19 period. Furthermore, the analysis highlights a strategic product gap, noting that Bajaj's lack of presence in the ICE scooter segment inherently limits its potential for market share expansion within India. While a reduction in the Goods and Services Tax (GST) on three-wheelers from 28% to 18% is a positive development, Morgan Stanley anticipates this will result in only limited volume increases, suggesting it is insufficient to offset the more significant structural headwinds.

Key Decisions for Investors

• The downgrade to 'Underweight' and the significant price target reduction from Morgan Stanley warrant a reassessment of bullish positions on Bajaj Auto, given the highlighted fundamental weaknesses.
• Investors should closely monitor monthly retail sales data to track the company's domestic ICE two-wheeler market share, as a continued decline from its current ~9% level would validate the bearish thesis.
• Consider the strategic disadvantage of Bajaj's portfolio, which lacks an ICE scooter offering and has a heavy 40% export dependency, potentially favoring peers with a stronger domestic focus and a more diverse product mix.
• The positive impact of the GST cut on three-wheelers should be viewed cautiously, as it is expected to provide only a limited volume boost and may not be enough to counter the negative trends in the core two-wheeler segment.