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Bajaj Auto Ltd Market Impact Note Q3FY20 For Target Rs.3475 - HDFC Securities

Key highlights of the quarter:

* Bajaj Auto reported good set of numbers for Q3FY20 which were in-line with the market expectation. Revenue/EBITDA/PAT grew by 3.1/18.3/14.5% YoY, respectively.

* Overall volumes fell by 4.6% YoY owing to 4.7% YoY fall in Motorcycle (2W) volumes and 3.4% YoY fall in commercial vehicle (CV)/three-wheeler (3W) volumes in Q3FY20. Blended realization grew by 7.6% YoY due to price hike and better product mix owing to better performance in overall exports and CV sales.

* The performance of Bajaj was in-line with the industry with market share in 2W was at ~20%. Bajaj has been able to maintain its dominance in domestic CV/3W segment with overall market share of 57%.

* The management expect some weakness in domestic motorcycle industry in coming 2-3 quarters owing to price hike post BS-VI implementation, despite expectations of some pre-buying to play out in Q4FY20.

* On the margin front, the management highlighted that commodity prices have started rising and may see material impact from Q1FY21. For Bajaj’s margin would be driven by how product mix within motorcycle and between exports and domestic market play out in coming times as higher share of domestic motorcycle may lead to lower margin.

* Bajaj is also strengthening its presence in premium bike segment by entering into an agreement with Triumph during the quarter to produce mid-sized bikes (200cc-750cc) from 2022.

View: For Bajaj Auto, improvement in margin driven by overall product mix was key positive for the quarter. While management has highlighted uncertainty in demand environment in near term, it is constantly working on improving its product portfolio with variety of models like Dominar, Pulsar, Husqvarna are planned to be launched in FY21. We believe Bajaj is better placed to sail through with BS-VI implementations due to its diversified product mix (40-45% of total volume coming from overall exports, ~20% from domestic premium bike and ~8% from domestic 3W), which has better margin profile and likely to see lower impact of BS-VI. We have a long-term positive stance on Bajaj Auto considering its focus on market share in domestic Motorcycle industry, strong R&D capabilities, robust balance sheet with huge cash and cash equivalent of ~Rs.174.07 bn (as on Dec’19), strong return ratios with ROE of over 20%, ROCE of close to 30% and dividend yield of ~2% for past two years. We maintain our Buy rating on the stock with the target price of Rs.3475 at 18x FY21E EPS of Rs.184.6 and adding Rs.152 per share for 48% stake in KTM AG of Austria (at 18x FY19 Bajaj’s share of EPS of Rs.12.1 after 30% holding company discount). Any earning/rating revision would depend on the performance of new launches, improvement in overall EBITDA, rollover to the next financial year and changes in general business momentum.

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