ADD on Bajaj Auto - Resilient margins - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Bajaj Auto (Q4FY20 Results Review): Resilient margins. ADD
(TP Rs 2,850, CMP Rs 2, 558, MCap Rs 740 bn)

Bajaj Auto's 4Q PAT (flat/4% YoY/ QoQ) beat was driven by a richer product mix as well as improved profitability. Going ahead, as the environment will remain uncertain, the management expects margins to correct from ~18% levels of 4Q. The OEM will pass on the benefits of a weakening INR to aid demand, particularly in the African markets. We re-iterate our ADD rating on the stock, while we expect volumes in the high growth export markets (which are ~45% of vols) to decline in FY21E. A diversified product mix and healthy balance sheet will cushion the impact of the volatile macro environment.

4QFY20 Financials: Volumes declined ~17% YoY and QoQ. However, the average realization grew 10/8% YoY/QoQ owing to better product mix and price hikes. Revenues declined 8/11% YoY/QoQ. EBITDA margin at 18.4% expanded (+185/50bps YoY/QoQ) due to richer product mix and favorable forex rate. Corporate tax rate was lower at 23.9% (-650bps YoY) due to change in tax structure. Reported PAT grew flat/4% YoY/QoQ.

Call & other takeaways: (1) The Nigerian market is going through the dual crisis of COVID-19 and fall in crude prices; similar to the earlier downturn, the devaluation of the Nigerian Niara is causing concerns. (2) Most of Bajaj's export countries are under lockdown and retails in the international markets are currently at 35% of normal levels. (3) The co has gained market share in the African market, currently at ~40%. Bajaj is now the largest player, as the Chinese competition is highly fragmented. The co is the market leader across markets including Egypt. (4) In India, 50-60% of the dealerships are in the green zone and are witnessing a 50% productivity in sales, whereas servicing is at 65-70% of the normal levels. Overall retails are at 25% levels. (5) COVID situation will impact the customer's behavior as they will down trade to lower variants (within the respective categories). Rural and semi-urban areas could see positive impact post monsoons. (6) The share of financing is higher in 3Ws (as compared to 2Ws). Bajaj has 85-90% market share in small 3Ws which are not used for shared rides (more than 5 persons). Management expects this segment to be less impacted post COVID as the price hikes in larger 3Ws is significantly higher post BSVI transition.

STANCE: We increase our FY21/22E EPS by ~7% to factor in the higher than expected margins in 4Q. We continue to value the stock at 17x on FY22E EPS (in line with the long term historic average trading multiple) with a TP of Rs 2,850. Key risks: Extended impact due to COVID on the downside, an increase in oil prices on the upside.

Shares of BAJAJ AUTO LTD. was last trading in BSE at Rs.2558.05 as compared to the previous close of Rs. 2509.15. The total number of shares traded during the day was 16443 in over 2394 trades.

The stock hit an intraday high of Rs. 2577.55 and intraday low of 2460. The net turnover during the day was Rs. 41652888.

Source : Equity Bulls

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