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Modifies dividend payout, linking it to cash levels…

…90% PAT dividend payout if cash >INR150b

Bajaj Auto (BJAUT)’s board has approved a new dividend policy that links dividend payout to the level of cash/cash equivalents, in turn increasing the payout to 90% of PAT (against 50% payout in the old policy). Considering a) strong operating cashflows, b) limited avenues to deploy cash on the books, and c) declining yields on treasure, this is a step in the right direction and could lead to a rerating.

* Under the old dividend policy, payout was planned at 50% of PAT.

* Under the revised policy, dividend payout is linked to the level of cash on the books, as follows:

      * Cash > INR150b – dividend payout of 90% of PAT

      * Cash at INR75–150b – dividend payout of 70% of PAT

      * Cash < INR75b – dividend payout of 50% of PAT.

* It had net cash of INR168.3b as of Dec’20, implying dividend payout of 90% of PAT.

* This, coupled with the withdrawal of the dividend distribution tax, would result in a substantial increase in DPS. Based on the new policy, we expect DPS to increase from INR75/INR85/INR85 to INR142/INR175/INR190 for FY21/FY22/FY23.

* The accumulation of cash on the balance sheet without clarity on deployment avenues was one of the concerns for Bajaj Auto. By linking dividend payout with cash, it balances dividend payout while also retaining a good amount of cash as a war chest for any potential M&A opportunities. The new dividend policy would substantially reduce the pace of accretion to surplus cash. We believe this is a step in the right direction as it would result in substantial improvement in RoE viz 280bp/490bp (to 28.5%/29.5%) v/s the old dividend policy. If business momentum remains strong, this would lead to a rerating for the stock.

* On the core business side, we expect strength in the export markets to continue, especially since the Africa business would see the benefit of higher crude oil prices (with a lag). In the India business, however, we expect weakness to persist at least for the next 1–2 quarters in both 2W and 3W. With this – coupled with commodity cost inflation, the return of marketing costs (in a weak demand environment), and aggressive pricing in the Entry segment – profitability is expected to be impacted in 4QFY21.

* Valuation and view: We lower our EPS for FY22/FY23E by 2%/4%, factoring in lower other income on account of higher dividend payout. BJAUT would benefit from a) the premiumization trend and b) good growth opportunity in exports. While domestic 3W recovery may be delayed, it is vulnerable to possible disruption from electrification. Valuations at 18x/17x FY22/FY23E consol. EPS largely captures the strong growth momentum. Maintain Neutral, with TP of INR3,875 (~18x Mar’23 consol EPS).

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