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Steady performance; gradual volume recovery seen

About the stock: Bajaj Auto (BAL) is the second largest motorcycle manufacturer, largest 3-W OEM domestically (FY22 market share at 18.2%, 61.5%, respectively).

* Exports comprised ~58% of FY22 volumes; 2-W:3-W mix at ~89:11 (overall)

* Strong b/s with ~| 15,500 crore cash on books (H1FY23), history of ~20% return ratios & one of the highest dividend yields among Nifty stocks

Q2FY23 Results: BAL reported a steady performance in Q2FY23.

* Net revenues in Q2FY23 came in at | 10,203 crore, up 27.5% QoQ

* Blended ASPs for the quarter were at | 86,107/unit, up 3.5% QoQ with total volumes in Q2FY23 at 11.5 lakh units, up 23.3% QoQ. Exports share in total volumes for the quarter was pegged at 40% vs. 62% in Q1FY23.

* EBITDA in Q2FY23 was at | 1,759 crore, margins:17.2% (up 104 bps QoQ)

* PAT was up 30% QoQ to | 1,530 crore, supported by higher other income

What should investors do: BAL’s stock price has grown at ~1.5% CAGR (from | 3,300 in October 2017) over five years underperforming broader Nifty Auto index

* We maintain HOLD rating on BAL primarily tracking slower pace of volume recovery in both domestic and export markets, delay in electric -3-W launch

Target Price and Valuation: Revising our estimates, we now value BAL at | 3,910 on SOTP basis (16x PE on FY24E Core EPS, stake in PMAG; previous target: | 4,180).

Key triggers for future price performance:

* Ramp-up of volumes in the electric 2-W space & expansion of network to 100 cities with expansion to 65 cities by FY23 end from current ~40 cities

* Successful completion of E-3W trials with launch expected by FY23E end

* With gradual recovery in sales volume, steady improvement in supply chain, we expect volume, net sales CAGR of ~6.2%, ~13.3%, respectively, in FY22-24E (2-W sales CAGR pegged at ~5.9%, 3-W sales CAGR at ~8.3%)

* Margins, RoCE to reach 18%, 28%, respectively, by FY24E amid cooling of input prices, positive operating leverage & healthy export realisations

Alternate Stock Idea: In our auto OEM coverage we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,590

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