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Chip shortage impacted all segments; Domestic outlook improving

Bajaj Auto Limited (BAL) reported decent set of numbers in Q1 FY23 despite challenging environment in both domestic and exports. Topline growth was up 7.7% yoy and 0.5% lower qoq as decline in volumes was more than offset by ASP growth on price hikes taken and better product & geography mix. Volumes in the quarter fell by 7.2% yoy and 4.4% qoq, while the realizations grew by 16% yoy and 5.2% qoq. During the quarter, domestic motorcycles de-grew by 8% yoy, while 3Ws were up by 163% yoy on low base. Exports of motorcycles de-grew by 4% yoy, while 3Ws fell by 48%. These were mainly on account of shortage of semi-conductor chips. EBITDA was up by 16% yoy to 12.9 bn, while margins moved upto 16.7%, a growth of 150 bps yoy, while remaining flattish qoq (16.8% margins adjusted for one time Maharashtra state benefit and employee stock related gains in the base quarter). Margins moved up yoy as RM costs to sales easened a bit (74.3% as % of sales v/s 74.7%) and some pruning of employee costs was also seen. All other cost items below operating levels remaining more or less range bound, bottomline came in 10.6% up yoy and 1.7% up qoq at ?11.73 bn. Tax rate was down at 24% qoq.

Chip shortage troubled all segments, easing of which should lead to higher volumes

Domestic motorcycle volumes witnessed an 8% dip. The company also lost some market share in quarter in the domestic 2Ws business, led by chip shortage which in turn led to drying up of inventories especially in the entry level commuters and the premium segments. While on the executive businesss, the success of Pulsar 125 NS resulted in market share gains upto 25% from 21% qoq. Chetak scooter sales almost doubled qoq to 6,200 units from 3,300 units in the quarter and has an order book of more than 10,000 units. BAL has planned a capacity of 0.5 mn EV scooters (Chetak) viewing its heartwarming response. The newly launched 250cc 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 new platforms to launch in the coming quarters to drive their business. Management strategized diverting available chip supply to high margin sports and premium segments and also to the 125cc high demand segment which led to low margin businesses to face the heat. However, now BAL has started procuring from alternative sources and also expects supply issues to normalize by Q2 post which the demand can be easily catered to.

On the EV front, BAL is chalking out an investment of ?10 bn over the next 5 years. The first tranche of this investment will be of ?3 bn at Akurdi, Pune for setting up a capacity of 0.5 mn per annum. BAL will get certain benefits under the Maharashtra Govt scheme for providing benefits for EV push. The company also plans its first 3W EV with a cautious introduction in the coming quarter.

Domestic 3Ws reported strong numbers yoy on low base, while qoq they faltered 23% as this segment also was impacted by chip shortage issue. The company however has a formidable market share at 70% in overall 3W segment as normalcy is back with opening of markets. In the CNG segment it has a market share of ~77% and with expansion of CNG stations the company can fancy its chances of further increasing it. CNG now contributes 62% 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 chip shortage issue gets resolved soon.

Exports strongly contributed to the volumes in Q1 which were >62% of total volumes v/s 60% qoq. The company is observing strong traction in markets such as LatAm and Asia. The company gained market share in LatAm on the back of strong traction seen in Pulsar NS and both the variants of Dominar (250cc and 400cc). In the Middle East, South East Asia and ASEAN markets as well exports remained strong. However, the sequential declines were observed in Africa in both 2W and 3W segments. African weakness was mainly due to Nigeria and other smaller countries which suffered huge devaluation against US dollar in their currencies despite strong demand. This led to sharp rise in acquisition costs over there which resulted in drop in sales. However, on resilience seen in continents other than Africa, management is confident of posting a 10% growth in exports in the current fiscal. We believe new launches in exports and easing of chip issue (not seen in Africa) should provide the necessary fillip to this business.

Margins to observe a steady growth

BAL’s EBITDA margins came at 16.7% in Q1, up by 150 bps yoy and flattish qoq despite higher RM costs. Going forward, we expect margins to improve as RM prices are easing especially steel. Management took a price hike of 1.5-2% in Q1 and may take further price hikes if required. Going further in FY23, we believe margins to improve since - 1). Input costs are moving down which would further impact margins positively 2). Price hikes taken to combat the RM cost hikes in raw material other thaan steel, like synthetic rubber, polypropylene, noble metals etc. 3). Rupee depreciation against dollar will be positive for BAL export realisations. Higher contribution from domestiic markets while a bit lower from exports markets like Africa may slightly dampen the margins. We therefore expect margins to be at 16.8%/17.7% in FY23E/24E respectively

Outlook and Valuation

BAL posted decent performance in Q1 despite driven by the challenges in the domestic 2W industry. Going forward, we believe there will be a short term pressure on export volumes, while domestic 2W volumes should see a good improvement from Q2 as the chip issue gets resolved. We also expect a 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 offset weakness in Africa. With higher capex associated with EVs, KTM Husky bike and Triumph (whenever it starts) at their Chakan plant shall further expand their market and ambit of portfolio. 3W performance should get back on track soon with chip issue resolving, EV 3W launch and success at CNG business. Favorable currency movement, easing of RM prices and price hikes should assist margins in the ensuing quarters. With strong balance sheet, robust return ratios, hefty dividend yield of 3.6% in FY22 and zero financial leverage, we believe the stock looks attractive at 17x FY 24E earnings. We maintain our BUY rating on the stock with a pruned down target price of ?4,261 (at 19x FY 24E earnings) on exports concerns.

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