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Results in line; cost pressure to persist

While Q2FY22 EBITDA of INR13.2bn is in line, near-term headwinds – commodity pressure, weaker-than-expected domestic demand – continue to overpower medium-term challenges. However, BJAUT is better placed than peers due to a favourable export outlook, currency tailwind, new platform launches and an improving mix.

On balance, we are cutting FY22E EPS by ~9% and FY23E by 7%. Maintain ‘BUY’ with a revised TP of INR4,337 (from INR4,482) as we roll over the valuation to March-23E earnings. The key development has been incorporation of captive financing wholly-owned subsidiary. Management indicated a 4–5 month waiting for its EV product; rampup is restricted due to supply constraints

Cost pressures continue to rear their head

Net revenue (adjusted for RoDTEP of earlier period) at INR.87bn was 3% above estimate. However, despite a favourable currency tailwind (1% QoQ lever), gross margin edged down QoQ by 140bps to 25.6% due to only a partial cost pass-through. QoQ commodity cost pressure was 3.5–4%. Management expects under-recovery to continue in Q3FY22 too. Control over staff cost and other expenses led to in-line EBIDTA with margin coming in flat QoQ at 15.2%.

Strong execution benefits from multiple tailwinds

Premiumisation continues to be the overarching strategy. This is reflected in its market share gain in the 125cc segment with Pulsar 125cc (~25% in Q2FY22 versus 22% in Q4FY21) and a rising share of 110cc and disc brake & electric start variants in the entry segment. We expect BJAUT to widen its product bouquet with offerings in the 125cc and 250cc segments, and continue to leverage the KTM, Triumph and Husqvarna stable. Improving outlook for 3Ws and exports along with currency tailwinds counter commodity inflation and softening domestic 2W demand. The company has EV capacity (Chetak) of 5K units a month. Management’s strategy is to go deep in existing cities rather than expanding in more cities without adequate supply. It is setting a new plant with capacity of 500K units per annum.

Outlook and valuation: Bright prospects; retain ‘BUY’

We like BJAUT’s strong execution, which instils confidence that it can succeed in expanding offerings. The new dividend policy will improve return ratios and offers 4–5% dividend yield. Maintain ‘BUY/SO’, valuing the stock at 22x Mar-23E core EPS of INR154 plus cash/share of INR773 and KTM at INR165. The stock is trading at FY22E/23E PER of 23.7/19.3x.

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