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Impressive margins despite adverse mix

Domestic outlook strong, exports yet to deliver

Bajaj Auto’s (BJAUT IN) Q3 EBITDA improved 37% YoY/ 14% QoQ to INR 24.3bn, with margin improvement of 30bps QoQ to 20.1%, ahead of our estimates. Average selling price (ASP) dipped 1.4% QoQ owing to lower contribution of 3W, partially offset by improved mix within exports (higher share of LATAM). The RM cost/vehicle dipped 1.2% QoQ. EBITDA/vehicle remained flat QoQ at INR 20,200 (near life-high) also aided by operating leverage. Export demand continued to be hit by unfavorable macro factors, though improving steadily.

Demand holding up well even post festive season

BJAUT expects domestic 2W industry to grow 8-10% going ahead. Pulsar continued to do well and has gained share in the +125cc segment. The management expects a minor sequential increase in RM costs in Q4FY24. Softening of RM costs in Q3 was passed on to customers via price cuts for select models and to exports markets. Bajaj expects Triumph capacity to increase from 20k per month to 30k per month by end of FY25 (this would be negative for Eicher (Sell rating) .  BJAUT expects to launch a new EV 2W product in Q1FY25, which may aid market share gains. It also expects to achieve 15,000 units per month run rate. BJAUT is working on a CNG motorcycle (launch in FY25).

Valuations: Recommend Buy; TP raised to INR 8,600

We are impressed by BJAUT’s margin resilience despite adverse mix (3W volume contribution down 300bps QoQ). This validates the fact that its margin performance is not overtly dependent on 3W performance (BJAUT did mention in recent years that its domestic 2W profitability delta has been the highest owing to superior mix). Domestic 2W retail market share gain has been impressive at 150bps YoY to 12% YTDFY24. Domestic 2W industry volumes have held up post festive season as well. We expect these to grow in high single-digit in FY25E.

Monitor exports recovery, which may be delayed. BJAUT with TVS are amongst the few listed OEMs that may post double-digit volume growth in FY25E. We up FY25E/26E EPS 2.5-6% on margin and volume upgrade and retain Buy with TP raised to INR 8,600 on 23x (from INR 7,054 on 20x earlier), led by resilient profitability, strong capital allocation (leading to increase RoE) and improving volume growth outlook and market share gains.

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