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Structural margin levers help maintain positive stance

Bajaj Auto reported a healthy operational performance in Q4FY21. Net revenues came in at | 8,596 crore (up 26.1% YoY) amid 17.9% YoY volume increase at 11. 7 lakh units (2-W up 23%, 3-W down 12%) and 7.8% QoQ ASP rise to | 73,492/unit. EBITDA margins for Q4FY21 came in at 17.7% (down 168 bps QoQ) with lower than anticipated decline in gross margins amid improved product mix in the 2-W segment. Consequent reported PAT was up 1.7% YoY to | 1,332 crore, with BAL declaring | 140/share as dividend for FY21, in line with its new dividend distribution policy.

Healthy volume growth lies ahead, amid near term hiccups

The upturn in 2-W demand following the post-Covid ‘unlock’ programme last year lost momentum in H2FY21, especially at the retail level. While demand initially was driven by the rural economy, latter legs were added by urban demand coming to the fore, as evidenced by improvement in scooter sub segment.

BAL performed marginally better than the industry, recording a slight retail market share gain to 12.08% as of March 2021. As per FADA commentary, 2-W channel inventory remains relatively elevated (30-35 days vs. 10-15 days for PV), signalling muted buyer sentiment on the ground. Against this backdrop, a sharp resurgence in Covid cases is set to dampen sentiment further in the near term, with several states under lockdown.

The 3-W industry is also facing delay in recovery amid renewed concerns over public transport in pandemic times and its negative impact on schooling and office movement. Nevertheless, favourable base effect following two years of subdued performance should aid domestic operations on CAGR basis in FY21-23E. Exports outperformance vis-à-vis domestic sales is expected to continue. We build 14.9%, 25.5%, 15.9% 2-W, 3-W, total volume CAGR in FY21-23E, respectively, with total volumes seen at 53.4 lakh units in FY23E.

Product mix improvement, price hikes key to margin resilience

With near-term demand outlook slightly strained, immediate relief via operating leverage is unlikely. This leaves price hikes and continued product mix improvement as levers for margin resilience. BAL has undertaken ~3.5% increase in prices thus far in CY21 and hopes to undertake another ~2% increase to offset higher input costs. It has done well on the product mix front, with Pulsar 125 proving to be highly successful and share of <110 cc motorcycles declining ~390 bps YoY to ~44.2% of overall sales in FY21. Expected exports outperformance, going ahead, along with 3-W rebound (courtesy low base) is also set to be beneficial for blended profitability. We build 16.4%, 17% margins in FY22E, FY23E respectively.

Valuation & Outlook

For BAL, we build 22.2%, 15.5% sales, PAT CAGR in FY21P-23E. We value BAL at unchanged target price of | 4,500 using SOTP method (core business at 21x FY23E EPS and 2x P/B on KTM investment), retaining our BUY rating. Despite likely slight elongation in demand recovery, presence of margin accretive factors helps us remain constructive on BAL. We are also enthused by the recent revision in dividend policy amid surplus cash on B/S at BAL.

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