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Neutral Bajaj Auto Ltd For Target Rs.4,250 

Below our estimate; higher RM cost keeps margin under pressure

Near term outlook muted for domestic 2Ws; Chetak to soon get FAME-2 approval

* BJAUT’s 1QFY22 performance was impacted by high RM and employee cost. While core business recovery is ahead of the market, its ramp-up in EVs would be a key monitorable as the inflection point for EVs comes closer. Higher dividend yield will provide a floor to valuations.

* We marginally lower our FY22E/FY23E EPS by 3% each to account for cost inflation and higher employee cost. We maintain our Neutral rating with a TP of INR4,250/share.

Commodity inflation diluted by price hike and favorable forex

* Revenue/EBITDA/PAT grew 140%/174%/101% YoY (-14%/-26.5%/-20% QoQ) in 1QFY22.

* Realizations grew 5.6% YoY (flat QoQ) to INR73.4k (est. INR72.8k), led by a price hike of 1.5% QoQ, favorable forex (1%), and mix.

* Gross margin declined by 110bp QoQ (-590bp YoY) to 27% (est. 27.4%) due to cost inflation of 3.7%, but diluted by a price hike and favorable forex.

* EBITDA margin declined by 250bp QoQ (+190bp YoY) to 15.2% (est. 17.1%), impacted by operating deleverage (160bp) and higher than expected staff cost. Higher other income and lower tax supported standalone PAT to ~INR10.6b (est. INR11.2b), a growth of 101% (-20% QoQ). BJAUT’s share of PAT from associates (KTM) stood at INR1.1b (v/s -INR1.32b/INR2.2b in 1Q/4QFY21)

Highlights from the management commentary

* Domestic 2W outlook: The recovery in domestic 2Ws would be slower than last year due to higher channel inventory as compared to last year (which had lower inventory due to the transition to BS-VI emission norms). Pent-up demand so far has been lower than last year. Industry Wholesales are expected to trail Retail in 2QFY22 and would be flat YoY. BJAUT expects to do better due to its 125cc and new offerings in the Commuter portfolio.

* Domestic 3W outlook: Return to normalcy was interrupted in Apr-May’21. However, Retails in Jun’21 were good at 6-7k units (v/s its expectation of 5k). Availability of financing is not a problem for 3Ws, though underwriting could be stricter.

* Export outlook: It is consistently exporting over 200k units/month despite weakness in pockets like ASEAN, South Asia, and a few markets in Africa/LatAm. It expects exports to stabilize and receive a boost once the COVID-19 situation improves in these pockets of weakness.

* Cost inflation of 3% is expected in 2QFY22, of which ~2% is expected to be offset through price hikes.

* EVs: Chetak is being launched in Nagpur, Aurangabad, Mysore, and Mangaluru. Chetak’s approval for FAME-2 subsidy is expected anytime now. It is setting-up a new subsidiary focused on EVs. BJAUT would be launching its own e-3W by the end of CY21.

Valuation and view

* Margin would be impacted by commodity headwinds in the near term. In the long term, BJAUT would benefit from: a) premiumization trend, b) good growth opportunity in exports, and c) potential position in the 2W Scooter market via EVs. While the recovery in domestic 3Ws might be delayed, it is vulnerable to a possible disruption from electrification.

* Valuations at 19.7x/17x. FY22E/FY23 consolidated EPS largely capture in the expected recovery. Dividend yield of 4.5-5% would provide a floor for the stock. We maintain our Neutral rating with a TP of INR4,250/share (~18x Sep’23E consolidated EPS).

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