Neutral Bajaj Auto Ltd : In line; higher RM cost keeps margin under pressure - Motilal Oswal
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In line; higher RM cost keeps margin under pressure
Exports to dilute impact of near term weakness in the domestic market
* Bajaj Auto’s (BJAUT) 4QFY21 performance was supported by favorable mix and price hikes, which helped in diluting commodity inflation. It has both near (3W recovery) and long term (premiumization and exports) levers, which are fairly reflected in current valuations. Higher dividend yield will provide a floor to valuations.
* We upgrade our FY22E/FY23E EPS by 1%/6.5% to factor in mix and upgrades in KTM’s PAT. We maintain our Neutral stance with a TP of INR4,150 per share.
Commodity inflation diluted by better mix and price hike
* Revenue/EBITDA/PAT fell 26%/21.7%/1.7% YoY and 7.3%/3.3%/10.7% YoY in 4Q and FY21, respectively.
* Realizations grew 7% YoY (7.8% QoQ) to INR73.5k (v/s our estimate of INR69.8k), driven by better mix and price hike of 2% from Jan’21.
* Gross margin fell 340bp YoY (-110bp QoQ) to 28.1% (v/s our estimate of 28.2%) due to commodity cost inflation of ~400bp, diluted by price hikes and mix.
* EBITDA margin contracted 60bp YoY (-170bp QoQ) to 17.7% (v/s our estimate of 17.8%). Lower other income restricted PAT growth to just ~2% YoY to INR13.3b (v/s our estimate of INR13b).
* BJAUT announced a dividend of INR140/share (~90% payout) based on its revised dividend policy.
Highlights from the management commentary
* The domestic demand situation remains ambiguous due to the COVID-19 led lockdown (25% dealerships are closed and 10% are operating with some restriction). The same is expected to remain weak during 1QFY22. Export demand remains strong on the back of stable crude prices and other commodities. Demand for Entry/Executive segment Motorcycles is impacted the most, whereas Premium offerings are doing relatively better.
* RM cost: The management expects a further 300bp impact in 1QFY22, for which it has taken a price hike of 1.5-2% in Apr’21. As demand normalizes, it would see the benefits of: a) mix as domestic 3W demand recovers, b) new export incentive schemes, and c) favorable forex.
* EV: It is very serious about the advent of e-2Ws and the transformation it ushers. For electric Chetak, the constraint is at the vendor end and not at the company level. It is expecting some improvement in supplies from Jun’21 onwards.
* The business case is currently not supportive for an e-3W. However, it expects this equation to change with a change in battery cost and support from the government (through regulation). The management is focused on building the most capable e-3Ws (towards which it would invest heavily), but doesn't want to go all out to sell an e-3W at any price and artificially drive electrification.
Valuation and view
* Margin would be impacted by commodity headwinds in the near term. However, in the long term, BJAUT would benefit from: a) premiumization trend, b) opportunity in exports, and c) potential entry into the 2W scooter market via an EV. While a domestic 3W recovery might be delayed, it is vulnerable to a possible disruption from electrification.
* Valuations at 18.9x/16.6x FY22E/FY23E consolidated EPS largely capture the strong growth momentum. We maintain our Neutral stance, with a TP of INR4,150/share (~18x Mar’23E consolidated EPS).
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