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Adverse product mix adding to margin pressure!
With margin at 15.4% (lower 250bps YoY / 90bps QoQ), Bajaj Auto’s (BJAUT) Q1FY20 operating performance missed estimates (PLe: 16.3%). BJAUT’s strategy to gain market share in the domestic motorcycle segment might have provided the company and its dealers much needed volumes but at the cost of profitability (margin erosion of ~250bps over FY18-19). The demand outlook for the domestic industry remains subdued and the management expects export 3Ws also to be weak over the coming months owing to the ongoing regularizations in Egypt. Given no incremental growth expected in the domestic three-wheeler market, downtrading in the motorcycle segment which could impact the premium segment, adverse export mix (higher share of Africa, lower 3Ws) and the challenge of passing on BS VI related costs in FY21, margins would continue to be under pressure. We have factored in volume growth & margins for FY20/21E at 4.3%/3.6% & 16%/15.7% respectively. We value the stock at 15x Mar’21 core EPS and maintain ‘Reduce’ with a target price of Rs2,646.
* Revenue in-line: BJAUT’s Q1FY20 total income grew 4% YoY (up 4.5% QoQ) to Rs77.6bn (PLe: Rs77.8bn). This was on the back of a 1.7% YoY / 4.5% QoQ volume growth and 2.2% YoY realization inch-up (flat QoQ).
* OPM at 15.4% missed estimates: EBITDA margin came in at 15.4% (PLe: 16.3%), lower 250bps YoY / down 90bps QoQ wherein gross margins contracted 80bps YoY (improving 10bps QoQ). Staff costs & other expenses as a % of sales rose 40bps & 130bps YoY (higher ad spend for exports). Absolute EBITDA declined 11% YoY (down 2.3% QoQ) to Rs12bn.
* With higher other income and lower tax rate (at 28.7% v/s 31% in Q1FY19), Net profit was up 1% YoY (up 5.5% QoQ) to Rs11.3bn (4% below PLe).
* Spare part revenue for BJAUT over Q1FY20 stood at Rs7.4bn while export revenue for the quarter was at ~Rs30bn (v/s Rs28bn in Q4FY19 & Rs33bn in Q1FY19).
* Key takeaways from the con-call:
(1) Demand scenario remains weak. For motorcycles, July has been worse than June. Expecting some recovery with on-set of the festive season. For domestic 3Ws, expecting some seasonal uptick Aug-Sep onwards. Exports remain steady with Africa market doing well. LatAM muted. Export growth for industry expected at 2-3%, whereas BJAUT is expected to continue growing at ~8%.
(2) The management expects EBITDA to have bottomed out and margins are expected to remain range bound around current levels hereon.
(3) Realisations were flat QoQ with price increase taken on account of ABS/CBS of ~Rs4K/unit, plus ~1.5-2% price hike taken in 3Ws.
(4) Inventory level currently stands higher at 7-8 weeks.
(5) Management has indicated at launch of a new product in the 125cc segment in the next 3 weeks.
(6) CT110cc launch received well and is helping improve realisations.
(7) BJAUT is undertaking network expansion in motorcycles wherein it is adding 40-50 dealers to existing network of 1100 dealers & 200-300 sub-dealers to existing 3000 sub-dealers
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