Bajaj’s 2QFY20 PAT (Rs 14bn, +22% YoY) was ahead of estimates as operating margins surprised at 16.6% (+110bp QoQ) & lower tax rates aided profitability. Reiterate Bajaj as preferred pick in the sector. Maintain BUY with a revised TP of Rs 3,530 (@ 18x Sep-21E EPS).
HIGHLIGHTS OF THE QUARTER
* Financials: While the vols declined by 12/6% YoY/QoQ, realization increased by 9/6% to ~Rs 66k due to an improved product mix. Thus, revenue declined by a mere 4/flat%. EBITDA came in at Rs 12.7bn (-10/+7%) as margin expanded 110bps QoQ to 16.6% due to improved product mix (richer mix of entry level portfolio – Platina H, CT110), price hikes and lower raw material costs (-140/-120bps). Lower tax rate at 12.8% was due to benefit of Rs 1.8bn from deferred tax liabilities (as co shifted to revised tax structure).
* Demand uptick is visible: Retail sales in India have risen from the Aug-19 lows with festive vols similar to last year. As demand has bottomed, the management expects FY20 vols to be flat YoY. In our 2QFY20 Preview note we highlighted that demand will benefit from hereon led by a good monsoons, discounts by OEMs and a benign base.
* BSVI – downsizing is the way ahead: To contend with rising costs (ABS, BSVI), Bajaj has launched 125cc Pulsar. Due to price hikes, premium 150cc customers will likely purchase the lower variants. Further, only the cos domestic portfolio will transition to BSVI, which is ~60% of overall sales. Bajaj is best positioned amongst the 2W OEMs for a shift to meet the emission norm due to its diversified portfolio.
* Demand in export markets is holding up: In export market Bajaj gained 250bps in 2QFY20. 3W sales in Egypt are settling at lower levels of 3,000 units (from 8,000 units earlier).
* EV: Recently showcased E-scooter Chetak will be launched in Pune in Jan-20. The management will assess demand trends for EVs as the demand is evolving. For 3Ws, the co believes that CNG variants are more competitive vis-à-vis lithium powered.
Re-iterate BUY as
(1) Industry demand trends are improving after several quarters of decline
(2) Bajaj is well prepared for BSVI due to its tie up with KTM.
Further, 3W/exports are ~50% of volumes which provides cushion against volatility in domestic 2Ws. (3) Co will launch new premium brands in India including the Husqvarna and Triumph (agreement is expected to be finalized shortly).
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