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Worst behind in both exports and India

Commodity/Fx to drive margins | Completes share buyback

* Bajaj Auto (BJAUT)’s 2QFY23 witnessed a good all-round performance, driven by favorable FX and operating leverage. While domestic outlook is improving, exports have bottomed out in 2QFY23. The on-going buy-back of shares, which supported the stock price, is now complete.

* We largely maintain our EPS for FY23E/FY24E. We reiterate our Neutral rating with a TP of INR4,000 (based on 16x Sep-24 Consol EPS).

Fx and operating leverage drive margins

* BJAUT’s 2QFY23 revenue/EBITDA/PAT grew 18%/40%/31% YoY to INR102b/INR17.6b/INR15.3b, respectively. For 1HFY23, revenue/EBITDA/PAT grew 14%/28%/21%, respectively.

* Net realizations grew ~18% YoY (~3% QoQ), led by price hikes and favorable Fx, volumes were flat YoY (+23% QoQ).

* EBITDA margins improved ~260bp YoY (+100bp QoQ) to ~17.2% (v/s est. 16.9%), driven by favorable Fx and operating leverage, despite a weaker mix. Higher-than-estimated other income boosted PAT to ~INR15.3b (v/s est. ~INR14.5b).

* Share of profit from associate (Pierrer Mobility) for 1HFY23 declined 47% YoY to INR1.98b.

* Cashflow from operations grew ~3% YoY in 1HFY23 to ~INR24.5b. Capex (net of disposals) was at ~INR2b (gross capex at INR3.35b), resulting in FCFF of ~INR22.5b.

* Sep-22 ending cash stood at INR155b post payout of INR70b toward dividend and buyback (v/s ~INR205b as of Jun-22).

Highlights from the management commentary

* Exports outlook: After witnessing a double-digit fall in retails and correcting inventory in 2QFY23, the company is witnessing a moderation in decline in Africa and LatAm, whereas demand from the ASEAN region remains strong. Hence, it expects export volumes in 3QFY23 to grow on QoQ basis.

* India 2W outlook: With its demand outlook bottoming out, the motorcycle industry (and BJAUT) is expected to grow in single digits. Chip supplies started to improve from Sep-22, helping BJAUT to build-back its inventory to five weeks, ahead of the festive season.

* E-2Ws: Chetak sales volume and footprint continues to scale up, with exit run rate up 2X over 1QFY23 average. It plans to reach 6k/month by endFY23 and would cover ~85 cities (from 39 cities as of Sep-22). It plans to launch 3-4 e-2Ws over the next 18 months.

* E-3Ws trials continued in various markets. It is incorporating users’ feedback from the trials and would launch the product only when completely satisfied but before the end of FY23.

Valuation and view

* While the India 2W business is showing signs of recovery, exports have bottomed out. BJAUT market share would benefit over the long term from: a) the premiumization trend, b) the opportunity in exports, and c) the potential sizeable position in the Scooter market via EVs. However, a large part of its India profit pool (of premium motorcycle and 3Ws) is vulnerable to a possible disruption from electrification.

* At 16.2x/14.9x FY23E/FY24E consolidated EPS, the stock’s valuation largely captures the expected recovery. BJAUT’s dividend yield of 5-5.5% would support the stock. We reiterate our Neutral rating with a TP of INR4,000/share (16x Sep24E consolidated EPS).

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