Why Bajaj Auto Share is Falling: Understanding the Market Reaction [17-October-2024]

As on October 17, 2024, Bajaj Auto shares experienced a downturn of approximately 10%. The primary catalyst for this decline appears to be the company’s recently announced September quarter financial results.While the earnings were generally in line with market expectations, the stock had already undergone a substantial rally in the preceding months.It is also worth noting that the stock has already been in a pre-existing bullish sentiment. When a stock remains bullish for such prolonger periods, traders become more sensitive to any potential shortcomings in the results.So, the question is, what the market did not like about the financial result of Bajaj Auto?Here is a short report on Bajaj Auto’s financial results and other reasons leading to a major price correction.1. The Core Reason: Disappointing Q2 ResultsThe primary catalyst for this downturn was Bajaj Auto’s Q2 earnings report. It fell short of market expectations. The company announced a small decline in margins. Investors have always considered margin decline as a red flag (see here for what caused the margin fall).The earnings per share (EPS) and net profit did not meet the projections, leading to immediate sell-offs.This earnings miss was exacerbated by a cut in future guidance (by Brokerages like Citi), signaling to investors that Bajaj Auto anticipates tougher times ahead.Financial Results (Revenue):Revenue (QTR)Sep ’24Jun ’24Sep ’23Operating Income13,247.2811,932.0710,838.24Qrtly. Growth (YOY)22.23%––Qrtly. Growth (QOQ)11.02%––The quarterly revenue of the company has grown by 22.23% (YOY) between Sep’23 and Sep’24 quarter. Even when compared to the quarter ending Jun’24, the revenue is up by 11.02%.So we can say that, the problem is not in the revenue.Financial Results (Operating Profit):Op Profit (QTR)Sep ’24Jun ’24Sep ’23Operating Profit (EBIT-Ot.I)2,555.262,275.432,038.31Qrtly. Growth (YOY)25.36%––Qrtly. Growth (QOQ)12.30%––The quarterly operating profit of the company has grown by 25.36% (YOY) between Sep’23 and Sep’24 quarter. As compared to the quarter ending Jun’24, the ‘operating profit’ is up by 12.3%.So, the problem is not even in the operating profit.Financial Results (PAT)PAT (QTR)Sep ’24Jun ’24Sep ’23PAT1,965.741,941.791,836.40Qrtly. Growth (YOY)7.04%––Qrtly. Growth (QOQ)1.23%––The quarterly PAT of the company has grown by 7.04% (YOY) between Sep’23 and Sep’24 quarter. As compared to the quarter ending Jun’24, the PAT is up by 1.23%.So, PAT growth is muted but now negative. This cannot be the cause of -10% price fall.Financial Results (PAT After Loss from associated Companies)Net PAT (QTR)Sep ’24Jun ’24Sep ’23PAT1,965.741,941.791,836.40Share Of P/L Of Associates-580.3—183.65Net PAT1,385.441,941.792,020.05Qrtly. Growth (YOY)-31.42%––Qrtly. Growth (QOQ)-28.65%––The NET PAT of the company as reported in Sep’24 quarter has fallen by -31.42% as compared to its number is Sep’23 quarter. Even as compared to the June’24 quarter, the net PAT has fallen by -28.65%.The core reason is the lined item called “Share Of P/L Of Associates.” What is it?The “Share of Profit/Loss (P/L) of Associates” refers to Bajaj Auto’s portion of profits or losses from its investments in associated companies. These are typically companies in which Bajaj Auto holds significant shares. The financial results of these associated companies are partially included in Bajaj Auto’s consolidated financial statements.In the September 2024 quarter, the share of associates resulted in a loss of -Rs.580.30 crore. Meaning that the companies in which Bajaj Auto has significant influence reported losses. This loss reduced Bajaj Auto’s overall net profit for the quarter.Without this loss, Bajaj Auto’s PAT before adjusting for associates was Rs.1,965.74 crore, but after including the associates’ losses, the final net PAT was reduced to Rs.1,385.44 crore.This dip in the net PAT of Bajaj Auto as caused a major dip its EPS. Any fall in EPS can cause a major impact on the share price.EPS (QTR)Sep ’24Jun ’24Sep ’23EPS49.769.671.4Qrtly. Growth (YOY)-30.39%––Qrtly. Growth (QOQ)-28.59%––The EPS (Earning Per Share) of the company has fallen by -30.39% as compared to its number is Sep’23 quarter. Even as compared to the June’24 quarter, the EPS is down by -28.59%.Weak Festive Season OutlookAdding to the woes, Bajaj Auto’s management provided a subdued forecast for the festive season. This period is typically buoyant for auto sales in India. But even in this quarter, they projected a mere 1-2% growth in motorcycle sales. It is significantly lower than the 5-6% industry analysts were hoping for.This conservative outlook was rooted in observed consumer behavior. Analysts are expecting fewer expensive purchases leading up to the festive season is always a bad news for auto sector. The cause for this negative sentiment is likely due to economic pressures like high interest rates and inflation.This is the reason why the Bajaj Auto’s number, giving a peep into the existing macro, has caused a decline in all major stocks of the Auto sector.Brokerage DowngradesThe situation was compounded by reactions from major financial institutions. For instance, Citi downgraded Bajaj Auto, setting a notably lower target price.This type of downgrades is suggesting a further potential drop in share value.A downgrade from reputable brokerages often lead to a domino effect, where investor confidence wanes, prompting more selling.Market Sentiment and Broader Economic FactorsThe general sentiment around auto stocks was already cautious. Wiy?It was influenced by broader economic indicators like rising fuel prices, which generally dampen the demand for vehicles.This backdrop made Bajaj Auto’s situation more precarious. In this negative environment, when the company reported a falling EPS, the market got the reason to beat the share price of Bajaj Auto.ConclusionThe immediate trigger for Bajaj Auto’s share price fall can be pinned on the disappointing Q2 results (a major fall in EPS).The management is also not confident of the festive sales forecast.But the situation is more nuanced than a few simple explanation like EPS and festive sales. There are more layers to the reason for this price correction.The company is also facing competitive pressures and export market challenges.Finally, I would like to add that Bajaj Auto is one of the premium stock of the market. Another 3-5% price correction in the next days, will start attracting value investors towards it. A -10% price fall for this kind of stock is already mouthwatering. But as some brokers have giving a lower price limit of about Rs.8000 levels, I think I’ll wait for a further correction in next days to make an entry.[Note: I remember, the same kind of negative price action happened with Polycab share price in January 2024. Since then, Polycab has gained by more than 75%.]