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RM pressures easing, but domestic demand remains weak

EV supply chain issues ironed out; focus on ramp-up

* Bajaj Auto (BJAUT)’s 3QFY22 beat was driven by lower RM cost pressures and favorable Fx. While exports remained robust and domestic 3W continued to recover, domestic 2Ws are yet to see recovery. In EVs, BJAUT is focusing on aggressively rolling out Chetak after ironing out supply chain issues. The e-3W launch is planned for FY23E.

* While we maintain our EPS estimates, we cut our P/E multiple to 16x (v/s 18x earlier) to account for hyper-competition in e-2Ws and the EV threat to the dominance of domestic 3Ws. We maintain a Neutral rating, with TP of INR3,500.

Lower cost inflation and favorable Fx aid margins

* 3QFY22 revenues were flat YoY (+5% MoM) at INR90.2b, while EBITDA/PAT declined 21%/22% YoY (+9%/+4% QoQ). 9MFY22 revenues/EBITDA/PAT grew 31%/10%/7% YoY to INR250.2b/INR37.5b/INR34.4b.

* Volumes declined 10% YoY (3% QoQ). Realization improved 12% YoY (1% QoQ) to INR76.4k (v/s est. INR76.3b).

* The gross margin declined 390bp YoY (+20bp QoQ) to 25.3% (v/s est 24.6%) on lower cost inflation and favorable Fx. The EBITDA margin contracted 420bp YoY (+60bp QoQ) to 15.2% (v/s est 14.3%).

* EBITDA declined 21% YoY (+9% MoM) to INR13.7b (v/s est INR12.9b). S/A adj. PAT declined 22% YoY (+4% QoQ) to INR12.1b (v/s est INR11.45b).

* The share of KTM’s PAT stood at INR1.4b (v/s INR2.65b in 2QFY22).

Highlights from management commentary

* Domestic 2Ws: It expects YoY decline for the industry in 4QFY22, whereas BJAUT is estimated to be flat.

* Egypt 3W ban: The ban was imposed from Oct’21; however, the government has allowed for the fulfillment of the order book. Hence, export volumes are not expected to be impacted until 4QFY22. It is working with the government and is hopeful of resolving some of the issues. Moreover, it has been developing new markets over the last 4–5 years, which should dilute any impact of the ban.

* EVs: It is seeing gradual improvement in the supply chain, particularly since changing its vendor base and localizing certain components. With improving visibility on supply, it plans to add 12 cities (to the 8 currently) in the coming months. It would also launch e-3Ws in FY23E (the product would go for approval in 4QFY22). It sold 2k units of the Chetak product in 3QFY22 (v/s 1.7k in 2Q) and has an order book of 10k units.

* EV strategy is three-pronged: It would: 1) prioritize certainty over speed and build a robust, dependable brand; 2) continue to build R&D and the supply chain, including partnerships (KTM, Yulu, etc); and 3) expand the product portfolio aggressively for India and exports through products made to address the targeted used cases. In e-2Ws, it currently has three platforms undergoing R&D, which would largely cover most of the use cases.

Valuation and view

* The BJAUT margin would continue to improve as it passes on the commodity inflation to customers. It would further benefit over the long term from a) the premiumization trend, b) the opportunity in exports, and c) the potential sizeable position in the Scooter market via EVs. While the domestic 3W market appears to be on the recovery path, it is still vulnerable to a possible disruption from electrification.

* At 18.5x/16.7x FY22E/FY23E consolidated EPS, the stock’s valuation largely captures the expected recovery. BJAUT’s dividend yield of 4–5% would support the stock. We maintain our Neutral rating, with TP of INR3,500/share (16x Mar’24E consolidated EPS).

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