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Margins remain stable despite adverse mix

Festive demand starts off below expectations

* BJAUT's 2QFY25 performance was in line with our estimates. EBITDA margin remained stable QoQ at 20.2% as the impact of an adverse mix and raw material inflation was offset by price hikes, favorable forex rates, and operating leverage benefits. However, the festive season has started on a weak note, with the industry posting just 1-2% YoY growth as of Dussehra and expecting 3-5% YoY growth during the season, assuming a revival before Diwali. The outlook for its key export market, Africa, remains uncertain, though the margin outlook is improving.

* BJAUT has outperformed the Nifty Auto Index over the last 12 months, fueled by market share gains in the 125cc+ domestic motorcycle segment, improved margins, and a unique shareholder reward policy. However, the stock now trades at ~38.5x/30x FY25E/26E EPS and appears fairly valued. We maintain our Neutral rating with a TP of INR11,450, based on 26x Sep’26E consol EPS.

Export recovery remains gradual

* BJAUT’s 2QFY25 revenue/EBITDA/PAT grew 22%/24%/21% YoY to INR131.3b/INR26.5b/INR22.2b (est. INR130.9b/INR26b/INR21.6b). 1HFY25 revenue/EBITDA/adj. PAT grew 19%/24%/20% YoY. 2HFY25 revenue/EBITDA/adj. PAT are expected to grow 14%/15%/14% YoY.

* EBITDA margin was stable QoQ at 20.2% (+40bp YoY/est. 19.8%). We had factored in a 40bp margin hit QoQ due to the deterioration in the product mix (higher Chetak + Freedom 125) to be partly offset by operating leverage benefit. Gross margin at 28.7% was lower than our estimate of 29.2%. We believe better cost control measures – lower staff costs (-10% QoQ) and other expenses (-1% QoQ) – helped to keep margins stable QoQ at 20.2%.

* There was an exceptional item of INR2.1b to account for a cumulative onetime impact on deferred tax on investment income due to changes in the taxation structure.

* Adjusted for one-time item, combined with higher-than-estimated other income, adj. PAT was INR22.2b (est. INR21.6b), up 21% YoY.

* Losses from associates stood at INR5.8b in 1HFY25 (vs. a profit of INR1.84b in 1HFY24). This was due to weak economic conditions in the US, restructuring of bicycle division, and a rise in production/personnel costs in Europe.

* FCFF for 1HFY25 stood at INR39.2b (INR36.1b for 1HFY24), led by strong operating cash flow of INR41.8b (INR38.7b in 1HFY24). Capex for 1HFY25 stood at INR2.55b (INR2.6b for 1HFY24).

* Cash on the balance sheet stood at INR163.9b as of Sep’24 after investment of INR12b in strategic growth initiatives (Bajaj Auto Credit and EV Capex) and the dividend payment of INR22.3b in 1HFY25.

Highlights from the management commentary

* Domestic 2W: The motorcycle industry saw 1-2% growth during the festive season, falling short of the expected 5-6% growth. The management is hopeful of a demand recovery in Diwali and expects the overall festive season to end with 3-5% YoY growth. The management expects the 2W industry to clock 5% growth in FY25.

* Exports: 2Q was better than 1Q, and 3Q is expected to improve further with over 10% growth. LATAM region has seen an impressive 20% YoY growth. Nigeria's motorcycle sales have rebounded from 5k units in Apr’24 to 25k units in Sep’24. On account of a richer mix and favorable USD exchange rates, export revenue growth is likely to be better than volume growth going ahead.

* Freedom 125: BJAUT sold over 10k units by Sep’24, with expectations to reach 18k units in Oct’24. It now plans to increase production capacity to 30k units per month in 3Q and 40k units in 4Q.

* Green vehicles: Electric (EV) and CNG vehicles contributed to ~44% of its domestic revenue. EV portfolio contributed to ~20% of revenue. The overall EV segment, including both Chetak and 3W, recorded flat EBITDA margins in 2Q, after accounting for PLI benefits. Chetak remained a drag on overall EV margins even as e-3Ws remain highly profitable.

* Input costs are likely to remain stable QoQ in 3Q.

Valuation and view

* We maintain our FY25/FY26 earnings estimates. The festive season has started off on a weak note, with the overall industry likely to post 5% YoY growth in FY25, lower than earlier envisaged. Even the export outlook remains uncertain.

* BJAUT has witnessed a significant re-rating in the last 12 months, aided by market share gains in the 125cc+ domestic motorcycle segment, improved margins, and a one-of-a-kind policy to reward its shareholders. After the sharp rally, the stock now trades at ~38.5x/30x FY25E/26E EPS, appearing fairly valued. We maintain our Neutral rating with a TP of INR11,450, based on 26x Sep’26E consol EPS.

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