Above estimates; low RM cost and operating leverage drives margin
RM cost inflation, operating deleverage to affect margin in coming quarters
* Bajaj Auto (BJAUT)’s operating performance was driven by favorable mix, lower marketing spends, and operating leverage. It has both near (3W recovery) and long term (premiumization and exports) levers, which are fairly reflected in current valuations.
* We upgrade our FY21E/FY22E EPS by 7%/5% to factor in mix, cost savings, and an upgrade in KTM’s PAT. Maintain Neutral.
Operating performance driven by better mix and operating leverage
* 3QFY21 revenue/EBITDA/PAT grew 16.6%/26.5%/23.4% YoY. For 9MFY21, revenue/EBITDA/PAT declined 17.1%/11.4%/15% YoY.
* Realizations grew 7% YoY (flat QoQ) to INR68.2k (v/s our estimate of INR68.6k). Gross margin declined 90bp YoY (+10bp QoQ) to 29.2% (v/s our estimate of 28.5%) on lower 3W volumes, but was aided by favorable mix of Premium Motorcycles in both domestic and export markets.
* EBITDA margin expanded 150bp YoY (+170bp QoQ) to 19.4% (v/s our estimate of 17.5%) largely due to lower staff cost and marketing spends.
* Higher income boosted PAT to INR15.6b (v/s our estimate of INR13.9b).
Highlights from the management commentary
* 4QFY21 outlook: Domestic 2W sales were back to last year’s levels. Base effect will drive growth, but on a like-to-like basis it would be in low singledigits. Domestic 3Ws would see a QoQ recovery, but decline 50% YoY. The growth momentum in exports would continue, with 12-15% growth in most markets. If ASEAN recovers, it would clock its best ever exports.
* 2W export volumes have recovered well with: a) South Asia (excluding Sri Lanka) and Africa back to pre-COVID levels, b) LatAm at 80-90% levels, and c) ASEAN at 50% levels. 3W exports are seeing a gradual recovery with LatAm at 50-60%, ASEAN at 25%, and other markets at or above pre-COVID levels. BJAUT has gained market share in all export markets.
* RM cost is estimated to increase by 3pp QoQ due to commodity cost inflation. It has raised prices by 1% each in domestic 2W/3W in 3QFY21 and by 1.25% in Jan’21 for domestic 2W. It also hiked export prices to cover capping of MEIS incentives and rise in RM cost. Price increases have to be calibrated as demand recovery is fragile, and might be required to be phased out.
* EV: Chetak e-scooter bookings remains closed since the end of Mar’20 due to supply chain issues. It expects to iron out these issues in the next 2-3 months and would look to expand its presence in the top 24 cities by FY22- end (from two cities at present). It is actively pursuing development of e3W and e-Qute, and plans to launch one in 2HFY22.
* Capex for FY22/FY23 would be higher than the normal run-rate as it would be investing INR6.5b for a new plant for high-end Bikes (commissioning in FY23). Capex for FY22/FY23 would be INR5.5-6b p.a.
Valuation and view
* BJAUT would benefit from: a) premiumization trend, and b) good growth opportunity in exports. While domestic 3W recovery might be delayed, it is vulnerable from a possible disruption from electrification.
* Valuations at 17.9x/16.6x FY22E/FY23E consolidated EPS largely capture the strong growth momentum. Maintain Neutral, with a TP of INR4,000/share.
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