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Steady quarter; input costs to continue to pinch…

About the stock: Bajaj Auto (BAL) is the second largest motorcycle manufacturer and largest 3-W OEM domestically (FY21 market share at 18%, 50.6% respectively).

* Exports comprised ~52% of FY21 volumes; >125 cc motorcycles constituted ~28% of FY21 volumes with Pulsar 125 enjoying good success

* Strong b/s with ~| 17,500 crore surplus cash on books (H1FY22), history of >20% return ratios & one of the highest dividend yields among Nifty stocks

Q2FY22 Results: BAL reported steady Q2FY22 results.

* Net revenues were at | 8,762 crore, up 18.6% QoQ

* Reported EBITDA margins at 16% were higher by 83 bps sequentially

* Consequent reported PAT was up 20.1% QoQ to | 1,275 crore

What should investors do? BAL’s stock price has outperformed Nifty Auto index over the past five years, having grown at ~6% CAGR (~| 2,800 in October 2016).

* We maintain HOLD on margin pressures, lack of immediate triggers

Target Price and Valuation: We value BAL at | 4,220 on SOTP basis (21x PE on FY23E standalone EPS, stake in PMAG; previous target | 4,275).

Key triggers for future price performance:

* We expect volume, net sales CAGR of 13.5%, 19.2% over FY21-23E (2-W CAGR 12.4%, 3-W CAGR 24.1%) aided by low base, pent-up demand

* Difficulty in passing on cost increases to continue to pressurise margins over medium term; seen margins at 15.7% by FY23E

* Revised dividend distribution policy (up to 90% payout for surplus funds in excess of | 15,000 crore) to ensure high dividend yield in future

* Ramping up of electric 2-W production; electric 3-W introduction

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 | 1,000

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