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Strong beat led by mix, Fx and commodity benefits

Benefits of softening RM costs largely captured in 3Q performance

* Bajaj Auto (BJAUT) witnessed benefits of softening RM prices and favorable FX in 3QFY23, resulting in an eight-quarter high EBITDA margin of 19.1% (vs est. 16.7%). While export markets may take 1-2 quarters to recover, muted demand for domestic entry-level 2W may limit prospects of a healthy allround growth for the company in the near term.

* We raise our FY23/FY24 EPS estimates by 4.5%/6% to factor in mix and FX benefits. We reiterate our Neutral rating with a TP of INR4,150 (based on 16x Dec-24 Consol EPS).

EBITDA margin at eight-quarter high largely driven by softening RM

* BJAUT’s 3QFY23 revenue/EBITDA/PAT grew 3%/30%/23% YoY to INR93.2b/ INR17.8b/INR14.9b. In 9MFY23, revenue/EBITDA/PAT grew 10%/29%/22%.

* Volume declined 17% YoY, while net realizations grew ~24% YoY/7% QoQ to INR94.7k/unit (vs est INR87.8k), led by favorable mix and FX.

* Gross margin expanded 410bp YoY/280bp QoQ to at 29.4% (vs est 27.6%), further supported by the softening RM costs.

* EBITDA margin expanded 390bp YoY to 19.1% (vs est 16.7%). EBITDA grew ~30% YoY to INR17.8b (vs est INR14.4b).

* Better operating performance was partially offset by lower other income, resulting in adj. PAT of INR14.9b (+23% YoY) vs est INR12.7b.

* After the share buyback with a total payout of INR31b (incl tax), BJAUT’s surplus cash balance stood at INR148.9b as of 31st Dec’22.

Highlights from the management commentary

* Exports–FX a major concern in 3Q; Retails likely to have bottomed out: Industry retail in South Asia, Africa and LatAM were down by 30% YoY in 3QFY23. The ASEAN market was an exception with double-digit growth, led by post-Covid pent-up demand. Overall, BJAUT expects normalcy to return from May-Jun’23, firstly in LatAM, followed by Africa. Nigeria is expected to recover by Mar’23-end after national elections.

 * India 2W outlook: The industry has been growing at 3-5% (adj. for the base) and should continue to grow by the same rate. Rural demand remains soft, hurting the entry-level motorcycle segment. It has gained 2pp market share in >125cc segment, which now accounts for 66% of its volume.

* RM cost softening was the major reason for the EBITDA margin expansion in 3QFY23. A large part of the benefit has already been reflected in 3Q margins. Meanwhile, prices of metals such as aluminum, nickel and copper have started rising; hence, expect gross margins to be flat QoQ in 4Q.

* E-2Ws: The company announced exclusive retail and service stores for Chetak (e-2W) to provide differentiated ownership experience to customers.

Valuation and view

* Both domestic and export volumes are expected to recover in FY24 onwards from the low base, driving good earnings recovery. We expect BJAUT to benefit from market share gains over the long term, led by: 1) the premiumization trend, 2) the opportunity in exports, and 3) the potential sizeable position in the Scooter market via EVs. However, a large part of its India profit pool (of premium motorcycle and 3Ws) is vulnerable to possible disruption from electrification.

* At 15.4x/14.0 x FY24E/FY25E consolidated EPS, the stock’s valuation fairly reflects for expected recovery as well as risk of EVs. BJAUT’s dividend yield of 5-5.5% should support the stock. We reiterate our Neutral rating with a TP of INR4,150/share (16x Dec-24E consolidated EPS).

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