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Demand outlook mixed; Gross margins surprised positively  

Valuation and View – Not targeting aggressive ramp?up in EVs  

BJAUT’s 3QFY23 results were better than expected as EBITDA/adj.PAT beat our/consensus estimates by 14.5%/8%. This was led by sharp 280bp QoQ (+410bp) expansion in gross margins at 29.4% (est 27.6%). With large of RM benefit now part of P&L (~70% gross margins expansion was led by RM softening), we expect the same to stabilize ahead. ASPs continue to grow for the fourth consecutive quarter by healthy 6.9% QoQ at record Rs94.7k/unit led by + fx, higher spares sales and favorable mix. Overall demand outlook remain mix as 1) domestic 2W volumes recovery continues to remain hopeful, 2) exports near?term volumes to see recovery in dispatches butretails to be weak led by currency headwinds in key African markets, 3) 3W volumes expected to recover in near term but to normalize post restocking. However, going ahead, INR depreciation, healthy exports mix to keep margins at an elevated level, we believe

Bajaj Auto is upping the game in domestic EV space but are not chasing volume/market share. The near?term focus is to 1) increase distribution for Chetak (to 100 cities by Apr’23 from 50 cities now) and 2) new product launches in B2B segments (by leveraging Yulu). Rigorous trials for EV 3Ws are also under way while commercial launch is targeted by Mar’23. We raise FY24/25 EPS by 1?2% to factor in for +fx. We build in revenue/EBITDA/Adj. PAT CAGR of 12.1%/16.3%/11.5% over FY22?25E. We maintain BUY with TP of Rs4,438 (v/s Rs4,355 earlier) at 17x Sep’24 EPS. Significant ramp?up in EV 2Ws/3Ws remain key re?rating triggers ahead. We like TVSL/EIM over BJAUT/HMCL among 2Ws space. 

Result Highlights? Margin expanded ~180bp QoQ driven by RM decline

* Revenues declined 8.7% QoQ (+3.3% YoY) at Rs93.2b (est Rs89.8b) as ~14.6% QoQ decline in volumes were partially offset by ~7% QoQ ASP increase at Rs94.7k/unit (record, est Rs91.3/unit). This was led by +fx, favorable mix and higher spare sales which came in at Rs11b (v/s Rs10.5b in 2QFY23).

* Gross margins surprised positively and expanded 280bp QoQ (+410bp YoY) at 29.3% (est 27.6%) driven largely by decline in RM cost (~70% contribution in gross margins expansion). This was partially offset by negative operating leverage leading to ~1% QoQ growth in EBITDA at Rs17.8b (est Rs15.5b). Consequently, margins expanded 180bp QoQ/ 390bp YoY at 19.1% (est at 17.3%). Other income declined 19% QoQ (?1% YoY) at Rs2.7b (est Rs3.3b) impacted adj.PAT which fell 2.5% QoQ (+22.8% YoY) at Rs14.9b (est Rs13.8b).

* 9MFY23 performance – Revenue/EBITDA/Adj.PAT grew 9.3%/24%/8%.

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