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Exports steady, RM cost pressures to continue

Bajaj Auto (BJAUT) reported EBITDA margin of 15.5% for Q1FY22, below our estimate of 17.3% and down 260bp QoQ on lower revenue from operations, increase in raw material cost, and higher employee costs. RM under-recovery is likely to continue in Q2 as well. Employee cost increased due to salary increments in April and increase in insurance premiums due to the pandemic. Export momentum remains strong, barring in a few regions amid high COVID cases. BJAUT continues to gain share in 125cc, with its Pulsar 125cc model. It is setting up a subsidiary for EVs with Rs1bn capital. Chetak production is likely to increase to 1,000/month and E-3W is expected to be launched this year. We remain positive on BJAUT on exports momentum. We have trimmed our margin assumptions to incorporate RM cost pressure. Maintain BUY with a revised TP of Rs4,458.

Margin miss on higher RM and employee costs

BJAUT’s EBITDA margin declined 260bp QoQ to 15.5%, below our estimate of 17.3%. Lower revenue from operations resulted in loss on spread of fixed costs by ~160bp. Increase in cost of raw material, net of increase in prices, lowered EBITDA margin by ~220bp. Also, employee cost as a percentage of revenue was higher at 4.9%, as cost increased 18% QoQ due to salary increments in April and increase in insurance premiums due to the pandemic. Revenue was Rs74.2bn, tad higher than expected on better ASP growth. ASP grew 7.8% YoY (down 0.3% QoQ). PAT declined 20% QoQ to Rs10.6bn, below our estimate of Rs11.5bn, as operating performance was weaker.

Exports strong even as retails impacted in ASEAN, Uganda amid Covid wave

Export demand remains strong even after pressure on retails in ASEAN, Uganda and some LatAm countries on the back of high number of Covid cases. These are sizable regions, as BJAUT has leadership position. In Philippines, it is number-1 in both 2W and 3W sales. In Uganda, it has 90% market share. It is the leader in Cambodia as well. In the last 12 months, as BJAUT was struggling to meet demand due to supply constraints, some Chinese players gained share in western Africa. The management is confident of regaining lost share as supply improves. Overall, BJAUT has improved its market share by 200bp in 2Ws and 600bp in 3Ws within Indian exporters.

Pulsar 125 continues to gain market share for BJAUT

BJAUT has improved its market share by 300bp in the 125cc+ category to 25%, led by success of Pulsar 125. Its 125cc segment market share is 28% now. The company launched a new variant, 125NS, during the quarter and it has been received well.

Riding on export momentum; maintain Buy

We remain positive on BJAUT on export momentum, as we expect its monthly runrate of 200k+ to sustain in the near term. We expect 3Ws to recover from H2FY22 onwards provided there is no third wave. We have trimmed our margin assumptions to incorporate RM cost pressures and tuned our volume assumptions a bit. It is currently trading at 17x FY23E EPS. Maintain BUY, with a revised SoTP-based TP of Rs4,458.

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