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Decent performance

Bajaj Auto’s topline expanded by 27.3% yoy, in a quarter which remained buoyant even after the end of festive season. Sequentially the top line declined by just 3.4%, while it expanded by 27.3% yoy. Volumes in the quarter moved up by 17.9% yoy after falling by 64% yoy in Q1 and 10% in Q2 and moving up by 8.7% in Q3. During the year, domestic motorcycles de-grew by 12.9%, while 3Ws plummeted by 70%.

Exports motorcycles fell by just 4 % in 2W, while 3Ws de-growth was at 15%. Realizations grew by 7.9% yoy in Q4, which were very well supported by export realizations, price hikes and higher contribution of premium and executive segment bikes in India. EBITDA excelled by 21.7% yoy to 15.2 bn, while margins came in at 17.7%. Margin drop stemming from higher RM costs was arrested by the lower other expenses (led by reduction in advertising and promotion expenses), better forex, product mix tilted towards exports, premium domestic bikes and 3Ws. Bottomline came in 1.7% up yoy at ₹13.3 bn. The company has declared ₹140/share (FV-10) of dividend, which is at 90% payout and a dividend yield of healthy 3.7%.

Exports demand to continue, 3Ws to revive, domestic motorcycles to grow post temporary brakes

Domestic motorcycle volumes grew by 21% yoy in Q4 on strong executive and premium bikes driven by the Pulsar variants (especially Pulsar 125cc which has quickly secured 19% market share in Q4 from 7% in FY20 in the executive segment despite its high price among its peers in the segment) alongwith KTM and Dominar bikes.

Management stated that there is no downtrading witnessed in 2W as expected by the markets, however higher segment brands like Pulsar and KTM have seen a good traction, while the supply side constraints are limited. We believe that the pent up demand is still prevailing and affordability is improving with job scenario getting brighter.

This is directly assisting the performance of Bajaj’s motor cycles. In Q1 FY22 we may witness softening of demand on the back of current second wave of the pandemic stifling production as well (Bajaj being Maharashtra centric). However, if things improve from Q2, then we may see a strong bounce back in motorcycle demand in India. Domestic 3Ws are getting back slowly to normalcy as we observed improvement every month and it fell by 38% yoy in Q4 much lower than 65% in Q3.

The company has maintained its market share at 85% in small passenger 3W segment, while in the big 3W passenger segment the company has increased it to 48% (12% ahead of #2 player). The cargo segment is also performing well for the company as it has narrowed the gap with the #1 player (6% currently) and has now achieved market share of 34%.

Outlook and Valuation

Bajaj came out with decent set of numbers in Q4, thanks to its strength in the exports markets and domestic 3W recovery. Going forward, we believe there will be a short term pressure on volumes and margins as second wave of Covid is intensifying in Q1 FY22. However, hoping the pandemic coming under control in Q2, we expect a strong bounce back like last year. Therefore, in that scenario, 2W demand in the domestic markets is expected to continue its uptrend with strong rural demand driven by expected good monsoons, pent up demand and new model platforms.

On the low base of FY21, we anticipate a strong FY22E. With exports bouncing back strongly and the current trend of high margin models performing well in the domestic markets, margins are expected to improve. Sequential 3W uptick which is happening, though a bit late, would support margins. With ultimate demand for personal mobility playing on, we expect Bajaj to get its advantage. With strong balance sheet, robust return ratios, 90% dividend payout ratio (yield of 3.7% in FY21) and zero financial leverage, we believe the stock looks attractive at 15x FY23E earnings. We maintain our BUY rating on the stock with a target price of ₹4,410 (at 18x FY23E earnings).

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