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Buy Bajaj Auto Ltd For Target Rs. 4,340

* Q4FY21 EBITDA margin came in at 17.7%, slightly above estimates of 17.2%. Premiumization benefits were visible, with increasing share of executive/premium models and also better share of higher variants within models.

* Management expects exports to reach a new peak in FY22, and domestic volumes to recover swiftly after easing of lockdowns. We expect strong volume upturn with 13% CAGR over FY21-24E, driven by growth of 12% in 2Ws and 21% in 3Ws.

* Despite near-term pressures, management expects margins to trend higher, due to rupee depreciation, incentives under new export promotion scheme, rebound in high-margin 3Ws and positive operating leverage. We expect EBITDA margin to expand from 17.8% in FY21 to 19.7% in FY24E.

* We expect strong earnings growth (19% CAGR), healthy ROEs (~26%), and large FCF generation (~Rs40bn/year) over FY21-24E. Retain Buy with a TP of Rs4,340 (Rs4,370 earlier), based on 18x FY23E P/E.

EBITDA margin beats estimates: Considering the low base in Q4FY20, results have been compared with Q4FY19 (2-year CAGR). Revenue grew at 8% CAGR to Rs86bn, (est.: Rs83bn), above estimates due to premiumization and higher share of spares. EBITDA margin expanded to 17.7% (est.: 17.2%), slightly above estimates on better mix and inventory gains. Premiumization benefits were visible, with increasing share of executive/premium models and also better share of higher variants within models. Other income declined at 12% CAGR to Rs2.8bn. Overall, adjusted PAT saw 12% CAGR to Rs13.3bn (est.: Rs13.1bn), broadly in line estimates.

Margins to improve: Margin headwinds ahead include 1) commodity inflation and 2) potential increase in other expenses as some of the costs are likely to normalize ahead. While margin tailwinds include 1) rupee depreciation; 2) incentives under the new RoTDEP scheme; 3) gradual recovery in high-margin 3W segment; and 4) better scale. Despite near-term pressures, management expects margins to trend higher in future. We expect EBITDA margin to expand from 17.8% in FY21 to 19.7% in FY24E.

Retain Buy: Our FY22/23 EPS estimates reduce marginally by 1% each to Rs200.8/Rs237.1, due to a reduction in volume assumptions. Introducing FY24E EPS of Rs267.4, factoring in volume growth of 10% and EBITDA margin of 19.7%. We reaffirm Buy with a TP of Rs4,340 (Rs4,370 earlier), based on 18x FY23E P/E. Target multiple implies core P/E of 18x and cash/share of Rs743. Key downside risks are lower-than-expected demand in key geographies, increase in competitive intensity and adverse currency/commodity prices.

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