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Higher exports, premium share boost margins

Bajaj Auto’s (BAL) Q3FY21 operating numbers were a beat on consensus expectations at 19.4% (up 152bps YoY). BAL margin resilience was driven by i) acceleration in export business coupled with improving mix, ii) pivot towards premium models leading to better motorcycle mix (higher Puslar-125cc sales) even as it had to contend with the headwind of delayed recovery in domestic 3Ws (high profitability) segment. Management expects near term margins to be under pressure due to rising commodity costs; however, expects to manage the same via operating leverage, price increases and mix. We believe BAL’s key mediumterm risk remains to domestic 3-W business on account of rising adoption of erickshaws. The stock remains attractive at ~15x PE /4.2% FCF yield on FY23E basis. We maintain BUY.

* Key highlights of the quarter: BAL reported 16.6% growth in revenue as ASP rose 7.3% YoY to ~Rs68.2k/unit supported by product mix, price hikes. EBITDA margin expanded ~152bps YoY due to tight control as employee costs (down 100bps YoY) and other expenses (down 139bps). Gross margin contracted 87bps due to higher RM costs as commodity basket prices edge higher (more inflation in 4Q). BAL reported highest ever PAT at ~Rs15.6bn with 23% YoY growth.

* Key takeaways from earnings call: Management indicated: a) Highest ever exports (~Rs41bn); BAL sold highest ever Pulsar motorcycles with 125cc variant leading the charge (164k units), with ~85% sales from geographies where BAL enjoys leadership position; b) South Asia (ex-Sri Lanka) is back to pre-covid levels, LatAm – 80-90%, while ASEAN still lagging at ~50%; c) BAL is pivoting towards premiumisation with highest-ever sales of Pulsar (420k units) recorded in Q3 and robust demand for higher-end KTM and Husqvarna models; Pulsar 125 is driving market share higher in 125cc segment (up to 25% vis-à-vis 13% in FY20); d) financing levels have risen in Q3 to 63% albeit down YoY (70%); Bajaj Finance holds ~60% share of the financing availed; e) BAL expects RM cost rise of ~3% as share of revenue in Q4 due to higher base metal prices; company has undertaken blended price increase of ~1-1.5% till post Q2; f) Q4 would surpass Q3 in terms of exports growth as underlying demand remains strong and g) in 3W category, sales are still lagging, services have recovered to 90%; cargo 3W stood at 70% of pre-covid levels.

* Maintain BUY: BAL continues to remain strong in exports market while improving mix in motorcycle segment via product and pricing lever. On 3Ws, demand recovery in FY22 is likely to happen on account of normalisation of public transportation. We revise our earnings estimates upwards by ~11%/4%/7% for FY21E/22E/23E, respectively, and value BAL at a target multiple of 18x FY23E EPS (earlier: 17x) and maintain our BUY rating with a revised target price of Rs4,419 (earlier: Rs3,820).

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