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Published on 25/05/2020 3:14:51 PM | Source: Emkay Global Financial Services

Hold Bajaj Auto Ltd For Target Rs. 2629 - Emkay Global

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Weak outlook for 3Ws and exports; retain Hold

 

* Q4FY20 revenue declined 8% yoy to Rs68.2bn (est.:Rs64.1bn), while earnings grew 23% to Rs13.1bn (est.:Rs10bn), above estimates due to higher OPM and other income. EBITDA margin expanded 185bps to 18.4% (est.: 16%), led by change in inventory, better mix and benign forex.

* Demand prospects remain subdued for high-margin segments such as 3Ws and exports. Domestic 3Ws demand is likely to be affected by steep price hikes and financing issues. Also, demand in overseas markets is likely to be adversely impacted due to a fall in global commodity prices and adverse currency trends.

* Considering lower volume assumptions, we reduce our FY21 EPS estimate by 19% to Rs129.5, and marginally reduce FY22E EPS by 3% to Rs184.8. Revenue/Earnings CAGR expected to be muted at 4%/2% over FY20-22E.

* We retain Hold rating, with TP of Rs2,629 (Rs2,708 earlier), based on 14x FY22E EPS and value of KTM at Rs85/share. In sector EAP, we have an EW stance on the company.

 

OPM above estimates, but not sustainable: Revenue fell 8% yoy to Rs68.2bn (est.: Rs64.1bn), above estimates due to better realizations. Volume declined 17% to 991,961 units, while realization grew by 11% to Rs68,711/unit. EBITDA margin expanded 185bps yoy to 18.4% (est.: 16%), supported by change in inventory, better mix and benign forex. Margin is expected to taper going ahead due to operating de-leverage and partial pass-through of rupee depreciation benefits. Overall, earnings grew 23% yoy to Rs13.1bn (est.:Rs10bn), above estimates due to higher-than-expected margin and other income. Other income grew 45% yoy to Rs5.3bn as it included a dividend from KTM (usually booked in Q1).

 

Demand prospects remain subdued for high-margin segments: Domestic 3W demand is expected to be affected by steep price increases (due to BS6 transition) and financing issues. We expect domestic 3W volume to decline by 4% CAGR over FY20-22E. Also, demand in overseas markets such as the Middle East, Africa and Latin America is likely to be adversely impacted due to a fall in global commodity prices and adverse currency movement. We expect exports to fall by 5% CAGR over FY20-22E.

 

Retain Hold: Considering lower volume assumptions, we reduce our FY21 EPS estimate by 19% to Rs129.5, and marginally reduce FY22E EPS by 3% to Rs184.8. We introduce FY23E EPS of Rs221.4, factoring in volume growth of 12% and EBITDA margin of 17.8%. We retain Hold rating, with TP of Rs2,629 (Rs2,708 earlier), based on 14x FY22E EPS and value of KTM at Rs85/share. In sector EAP, we have an EW stance on the company. Key upside risks are higher-than-expected demand in key geographies, reduction in competition intensity, decrease in commodity prices, and benign currency movements.

 

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