Hold Bajaj Auto Ltd For Target Rs.4,275 - ICICI Direct
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Switches stake in KTM AG with its parent (PMAG)…
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 ~| 20,000 crore surplus cash on books, history of >20% return ratios and one of the highest dividend yields among Nifty stocks
Key Event: BAL has switched its 48% stake in KTM AG with ~36.7% effective stake in its parent company i.e. Pierer Mobility AG (PMAG; listed entity with ~€1.9 billion market capitalisation) while retaining 1.5% residual stake in KTM AG.
* In terms of capabilities; BAL now has access to PMAG’s E-bikes segment as well as design & concept development abilities
* In the electric 2-W space, both companies are engaged in joint product development in this space and is outside the purview of the said transaction
* BAL will now accrue the portioned market capitalisation of PMAG in its SOTP valuation vs. our methodology of valuing its investment in KTM AG
What should investors do?
BAL’s stock price has outperformed Nifty Auto index in the past five years, having grown at ~8% CAGR (~| 2,900 in September 2016).
* We retain HOLD rating on BAL and await affirmative EV transition roadmap
Target Price and Valuation: Keeping our financials unchanged & building change in our SOTP based methodology we value BAL at | 4,275 (earlier target price | 4,350).
Key triggers for future price performance:
* Expect volume, net sales CAGR of 13.3%, 19.4%, respectively, in FY21-23E (2-W CAGR 12.4%, 3-W CAGR 21.4%) aided by low base, pent-up demand
* Revised dividend distribution policy to ensure high dividend yield in future
* Well charted transition strategy encompassing switch to electrification
Alternate Stock Idea: In our auto OEM coverage, we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with a target price of | 1,000
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