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Robust set of numbers, domestic business strong, exports to improve

Bajaj Auto Limited (BAL) reported healthy set of numbers in Q2 FY23 despite challenging environment in exports markets. Topline growth was up 27.6% qoq and 18.2% yoy as volumes recovered on improving semi conductor supply. Volumes in the quarter expanded by 23% qoq and 1% yoy, while the realizations grew by 17% yoy and 3.5% qoq. During the quarter, domestic motorcycles rebounded as they grew by 27% yoy and 98% qoq on strong momentum in sports portfolio, while 3Ws were up by 66% yoy and 91% qoq. Exports of motorcycles de-grew by 27% yoy and 25% qoq, while 3Ws fell by 17% yoy, while growing 22% qoq. The exports deceleration was on account of sharp depreciation in currencies in Africa v/s US$ and unavailability of US$ resulting in decline in retail demand. EBITDA was up by 25.5% yoy/35.6% qoq to 17.58 bn, while margins moved up by 120 bps yoy and 100 bps qoq upto 17.2%. Margins were up on judicious price increase, dynamic cost management and better foreign exchange realisations. Other operating revenues looked elevated as they included ?305 mn towards Maharashtra state incentive under Package Scheme of Incentives 2007 (PSI) for the period between April 2021 to March 2022. All other cost items below operating levels remaining more or less range bound, bottomline came in 20% up yoy and 30.4% up qoq at ?15.3 bn. Tax rate was steady at 24% qoq.

Chip shortage issues resolved completely, volumes to follow demand and not supply any more

Domestic motorcycle volumes witnessed a 98% growth qoq and 27% yoy. The company started gaining lost market share especially in the sports and executive segment. In the executive business, the success of Pulsar 125 NS and CT 125, launch of Pulsar N160 in sport segment led to winning back of some market share which was lost last quarter. Steady progress has being made on building EV portfolio as Chetak scooter sales jumped to 10,000 units in the quarter from 6,200 units qoq and aspires to sell 6,000 units per month from March 23 through its wide network of 773 dealers across the nation. BAL has planned a capacity of 0.5 mn EV scooters (Chetak) viewing its heartwarming response. The newly launched 250 cc platform is also performing well with both Pulsar 250 NS models attracting good response. Even in the sports segment, Dominar 400 is being received well. Management expects a full new range of new Pulsar variants along with altogether new platforms to be launched in the coming months to drive their business. The supply issue is 98% resolved now, which should now lead volumes to track demand which is robust and is getting better now with upcoming festivals and improving sentiments.

Domestic 3Ws reported strongest ever show as chip issues resolved and CNG demand is reaching new highs. The company’s 3W demand is now 54% of pre-covid levels with their market share reaching 72% (70% a quarter ago) which is all time high , due to CNG expansion, in which BAL has 80% (77% a qquarter ago) market share. CNG now contributes 67% (62% a quarter ago) of the overall 3W industry as compared to 24% a year ago. BAL being a sole leader in the CNG segment, 3Ws will even more strongly contribute to the numbers going forward as the segment demand is yet to reach 100% of pre-covid level.

Exports contribution has considerably fallen to 39.7% in Q2 v/s 62.2 qoq. The company is observing strong traction in markets like ASEAN, South and South East Asia and Middle East. LatAm market is slightly soft (5% down qoq), but Africa is deep into red (20% down). The sequential declines were observed in Africa in both 2W and 3W segments. African weakness was mainly due to huge devaluation of currencies in various countries led by the biggest oneNigeria; against US dollar and non availability of US$ leading to sharp rise in acquisition cost leading to decline in retail demand. Ban on 3Ws in Egypt is also impacting their 3W demand in exports. However, management is seeing better demand in Africa in Q3 due to pent-up demand and slight easing in currency situation there. On resilience seen in continents other than Africa, management is confident of posting better numbers in exports business in H2. We believe new launches in exports and easing of chip issue (not seen in Africa) should provide the necessary fillip to this business. High demand for Pulsar 250ccc and Dominar in LatAm (21% of exports 2W demand), robustness seen in ASEAN and Phillippines should also help the cause.

Margins to observe a steady growth

BAL’s EBITDA margins came at 17.2% in Q2, up by 100 bps qoq and 120 bps yoy despite neutral impact on RM costs. This was however due to judicious price increases, better cost management, higher 3W sales and favorable currency movement. Going forward, we expect margins to improve as RM prices are easing especially steel and aluminium. Management took a price hike of 1.5-2% in Q2, while further betterment in realisations may occur due to product mix and not by cost recovery. In rest of FY23 and FY24, we believe margins to improve since - 1). Input costs may gradually move down which would further impact margins positively 2). Good product mix on robust high margin 3W sales and BAL’s dominance in that segment 3). Rupee depreciation against dollar will be positive for BAL export realisations. 4). Easing of pressure in Africa. Higher contribution from domestic markets while a bit lower from exports markets like Africa may slightly dampen the margins, but the net-net impact should be positive. We therefore expect margins to be at 17.2%/17.9% in FY23E/24E respectively.

Outlook and Valuation

BAL posted solid performance in Q2 despite driven by the challenges in the exports business. Going forward, we believe there will be some easing in export volumes as pent-up demand is seen in Africa, while domestic 2W volumes should continue the momentum seen in Q2 as the chip issue is now completely resolved. We also expect strong traction coming from new launches and good monsoons which would drive rural markets. On the exports front, markets like LatAm and Asia should be able to somewhat offset weakness in Africa. With higher capex associated with EVs, new 2W platforms and maintenance capex (?7.5 bn) shall further expand their market and ambit of portfolio. 3W performance was robust in Q2, touching new highs, on CNG success. EV 3W launch should further aid the business. Favorable currency movement, easing of RM prices, price hikes and prudent cost management should assist margins in the ensuing quarters. With strong balance sheet, robust return ratios, hefty dividend yield of 3.9% in FY22 and zero financial leverage, we believe the stock looks attractive at 16.25x FY 24E earnings. We therefore maintain our BUY rating on the stock with a slightly pruned down target price (on exports concerns) of ? 4,174 (at 19x FY 24E earnings).

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