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Weak exports remain a concern; maintain HOLD

Q2FY23 EBITDA for Bajaj Auto grew 26% YoY to Rs17.6bn, clocking 6% above our estimate due to the revenue beat and lower-than-expected employee expenses. Revenue increased by 16% to Rs102bn, coming in 4% above our estimates on better geographical-mix in exports and higher incentives (both, production & export incentives). Going forward, we expect a 5% volume CAGR over FY22-25 (which is lower than the 8-11% CAGR for peers such as TVSL and HMCL), mainly due to higher exposure to overseas markets. Exports is likely to be under pressure in the near term, with decline of 15% in FY23, owing to adverse currency movements, high inflation and unfavorable government policies in the Africa/Middle East regions. In contrast, we expect domestic volumes to grow at 13% in FY23, driven by strong urban demand, better finance availability and favorable base effect. We increase FY22-25 EPS estimates by 2-4%, factoring-in an improvement in realizations. We maintain HOLD on the stock, with TP of Rs4,100/sh (Rs4,000 earlier), based on 17x Dec-24E Core EPS (Sep-24E earlier), value of investments at Rs155/sh and cash reserves of Rs614/sh.

EBITDA beat of 6%: Revenue grew by 16% YoY (4-yr CAGR at 6%) to Rs102bn (est: Rs98.2bn), above estimates due to better mix in exports (better share of the Latin America region) and higher incentives (in both, production and exports). EBITDA grew by 26% (4-yr CAGR at 6%) to Rs17.6bn, logging 6% higher than estimates, mainly led by lower-thanexpected employee expenses. EBITDA margin expanded by 120bps to 17.2%. Other income grew 5% to Rs3.3bn and Depreciation grew 2% to Rs670mn. Accordingly, adjusted PAT grew 20% (4-yr CAGR at 7%) to Rs15.3bn (est: Rs14.4bn), above estimates. Cash reserves stood at Rs155bn in Sep-22 vs. Rs205bn in Jun-22, post the pay-outs of almost Rs70bn towards dividend and buyback. Profit from associates for H1FY23 stood at Rs1.98bn vs Rs2.65bn last year. What we liked: 1) Strong revenue and margin performance. 2) Production ramp-up, as supply-chain issues were resolved through addition of vendors. 3) Positive growth in initial days of the festive season. What we did not like: 1) Q2 exports witnessed a steep decline, and weakness would continue in Q3. 2) Delays in launch of E-3Ws from Sep-22 to Mar-22.

Earnings-call KTAs: 1) Q2 production ramp-up was supported by improvement in chip supplies due to addition of new vendors. Chip-supply issues are mostly resolved. 2) Q2 realization growth was supported by better regional mix in exports and higher incentives (in both exports and production). 3) Festive season has commenced on a positive note, with single-digit growth. 4) In E-2Ws, Company has plans to launch 3-4 products across various use-cases in 18 months. 5) Q2 exports have declined due to weakness in emerging markets owing to adverse currency movement, USD availability issues, regulatory restrictions (Nigeria, Egypt) and inventory correction. Q3 exports are likely to be soft YoY, but should see an improvement QoQ. 6) In overseas markets, Company is increasing marketing efforts on a case-to-case basis, to support volumes. 7) In E-3Ws, the model launch has been delayed, but is expected to happen by Mar-23.

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