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Buy Bajaj Auto Ltd For Target Rs.4,748

Tough quarter; export outlook remains solid

Bajaj Auto’s (BAL) Q1FY22 EBITDA margins were below consensus expectations at 15.2% (down 257bps QoQ). BAL’s margins were impacted by negative operating leverage (India Covid impact) of 160bps QoQ, off-set partially by higher exports mix (up 14.5% QoQ), higher USD realization (~100bps QoQ benefit). BAL remains a strong beneficiary of robust export demand with unique tailwinds in H2FY22 (e.g. FX depreciation, RoDTEP export incentives) which is likely to aid margins amidst the inflationary environment. New platform and model launches (Sep’21 onwards) is likely to boost domestic growth while most export markets (except ASEAN region which is impacted by covid) continue to witness strong demand momentum. The valuations remain attractive at ~15x PE/ 5% FCF yield on FY23E basis. Maintain BUY.

* Key highlights of the quarter:

BAL has reported ~14% QoQ decline in revenue as ASPs were flat at ~Rs73.6k/unit supported by mix, price hikes (~2%). EBITDA margin contracted ~257bps QoQ as gross margins declined (118bps), commodity basket rose ~6-7% QoQ while price hikes incurred were only ~1.5-2%. Employee costs (up 132bps) also rose due to regular increments and higher employee policy premiums for Covid. BAL has reported PAT of ~Rs10.6bn (down 20% QoQ).

* Key takeaways from earnings call:

Management indicated: a) Second highest exports (~Rs45bn) in Q1 despite key markets in ASEAN still under lockdown due to covid; b) BAL increased its share in 125cc+ segment to 25% from 22% to No.2 position and reached an all-time high market share in 125cc segment in Q1; c) lower operating leverage impacted margins by 160bps while better forex realisations (100bps) and mix impact (30bps) aided margins; d) BAL’s strategy on electrification is focused on strong R&D (1500 people team) leading to superior products with strong customer centricity; d) domestic CV demand is gradually picking up (addition of 1k units per month); BAL has 85-90% market share in CNG 3W and management expects EV adoption to have marginal impact on 3W; e) BAL is likely to further witness ~3% QoQ RM cost rise; the company has taken another >1% price hike in Jul’21 along with the ~2% in Q1; and f) tailwinds from improving operating leverage, better forex is likely to aid margins in H2FY22 even as higher domestic sales is hurt gross margins due to unfavourable mix.

* Maintain BUY:

BAL is likely to navigate H2FY22 reasonably well as exports growth coupled with positive domestic operating leverage would aid margins. Any announcement on export-focussed schemes (e.g. RoDTEP, PLI) could act as upside triggers for the stock. We tweak our earnings estimates downwards by 2.6%/0.2% for FY22E/23E, respectively, and value BAL at an unchanged multiple of 18x FY23E EPS. We maintain our BUY rating with a revised target price of Rs4,748 (earlier: Rs4,756).

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