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Strong operating performance; domestic volumes to remain supportive

In 2QFY23, Bajaj Auto adj. EBITDA margin stood at 17.2% (+260bps YoY, +100bps QoQ), 70bps ahead of JMFe owing to favorable mix, better USD/INR realization and lower than expected impact of RM inflation. Domestic 2W volumes recovered during 2Q and are expected to further improve during 3Q owing to festive related demand. ECU supplies have almost normalized to 98% during 2Q helping company regain retail market share (increased 4ppt to 18%). Outlook for domestic 3W volume remains strong led by higher CNG demand. We expect steady domestic demand (led by premium segments) to offset macro headwinds in export markets. Chetak production is expected to ramp-up to 6k units/month by 4QFY23. Launch of first e-3W has been postponed to end of FY23 due to extension of product trials. All future capex is likely to be focused on EVs (towards new products and capacity) and premium motorcycles. Margins in the medium-term are likely to draw support from a) favorable mix, b) better export realization and c) softening commodity prices. Given the successful track record of product intervention by BJAUT in the last few years, we remain positive on the stock. We estimate revenue / EPS CAGR of c.11%/c.16% over FY22-25E. Maintain BUY with Sept’23 TP of INR 4,250 (17x PE). Delayed volume recovery in domestic market and continued weakness in export markets are the key risks.

* 2QFY23 – Margin beats estimate: In 2QFY23, BJAUT reported adjusted net sales of INR 102bn (+18% YoY, +27%QoQ), c.5% above JMFe. Realisation increased c.18% YoY (+3% QoQ). Adjusted EBITDA margin stood at 17.2% (+260bps YoY, +100bps QoQ), c.70bps ahead of JMFe. Sequential improvement in margin (100 bps) was led by a) favourable mix, b) better export realization (due to INR depreciation) and c) lower than expected impact of RM inflation. Adj. EBITDA stood at INR 17.6bn (+40% YoY, +36% QoQ). Adj. PAT for 2QFY23 stood at INR 15.3bn (+35% YoY, +30%QoQ), 9% higher than JMFe.

* Domestic market & outlook: Management highlighted that, in 2Q, BJAUT’s domestic 2W volume growth was led by improvement in ECU supplies. As per VAHAN data, industry registrations declined 6% in 2Q owing to muted demand in entry level segment even as 125cc+ segments continue to perform well. As per the management, purchasing power of a 2W customer is yet to recover post Covid-II. However, recent demand trend suggests low single-digit growth for the Industry in FY23. BJAUT gained retail market share by 4ppt QoQ to 18% during 2QFY23 on improving supplies. The strategy of upgrading customers to 125cc segment is working well. BJAUT intends to regain its lost share in 150cc+ motorcycle segment with product interventions. Management is cautiously optimistic for domestic 2W sales in 3Q owing to the festive season. Channel inventory stands at 5 weeks in preparation for festive sales. ECU supplies have recovered to 98% of normal level. The company also indicated of strong product launch pipeline going forward. Domestic 3W volume is recovering sequentially from a low base and the outlook remains strong driven by demand for CNG 3Ws. BJAUT’s market share in CNG 3Ws currently stands at a record 80% driven by rise in industry CNG penetration from 24% in FY21 to 67% in 2QFY23.

* Export market & outlook: Export business took a hit during 2Q owing to macro headwinds. Retail sales fell double-digit during 2Q in international market owing to 1) sharp devaluation in currency leading to increase in prices and 2) limited availability of USD. While the demand in ASEAN market was strong (owing to lifting of covid restrictions), it was muted in LATAM (-5% growth) and Africa (-20% growth). BJAUT took inventory correction during 2Q in-line with demand. Going ahead, the company expects the wholesales to perform in-line with retails. The company also expects relatively better export performance during 3Q owing to gradual normalisation in demand in the international markets. Import ban on 3Ws in Egypt and restrictions on 2W-taxi in Nigeria remains near-term headwind for exports

* Margin outlook: During 2Q, BJAUT witnessed c.1% RM inflation. This was offset by price hike taken at the start of the quarter, better mix and favourable currency movement. Recent softening in key commodity prices and further depreciation of INR (INR/USD in 2Q stood at INR79.8 vs. INR82 currently) will remain as a tailwind going ahead. The company may deploy some of these benefits via product interventions to gain market share.

* Update on e-2W/3W: BJAUT sold c.10k units of Chetak in Q2FY23 vs. 6.2k units in 1QFY23 on improving electronics’ supplies. The company plans to expand distribution to top 85 cities (from current c.40 cities) and ramp up Chetak’s volume to c.6k units/month by the end of FY23. It plans to expand e-2W portfolio launching by launching 3-4 new products over next 18 months covering different segments. Launch of its first e-3W has been delayed due to extension of trials. e-3W is now expected to be launched during 4QFY23. The company has 3-pronged strategy – 1) focus on dependability of the product (rather than the speed of launch), 2) build R&D capabilities and supply chain network and 3) expand product portfolio and reach across markets.

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