Maintain BUY on Bajaj Auto - A strong show, encouraging outlook - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Bajaj Auto's 3QFY21 PAT (+24/37% YoY/QoQ) beat was driven by strong profitability (EBITDA margin came in at 19.4%, +150/170bps YoY/QoQ). We have recently upgraded the stock to a BUY on the back of a firming recovery (link to our note- Beyond the Festive Season: Recovery Sustains). The management expects double-digit growth in FY22 in the domestic 2W market while export demand will remain healthy, driven by low-system inventories. Further, the local 3W volumes are expected to improve from hereon. We maintain BUY, given: (1) exports are firm across frontier markets as crude prices and other commodities are firming up; (2) 3W sales are expected to revive, particularly after the vaccine rollout; and (3) after Bajaj has finalised its agreement with Triumph, it is building a new facility in Chakan to increase production for premium vehicles.

3QFY21 Financials: Total vols grew 9/24% YoY/QoQ. Export vols witnessed strong growth at 22% YoY as international markets are now opening up. Realisations at Rs 68k improved 7% YoY, owing to BSVI cost pass-on to the customers and higher share of exports in the mix (53% vs 47/46% YoY/QoQ). Revenue grew 17/25%. EBITDA margin at 19.4% came in at a multi-quarter high (+150/170bps) owing to a rich product mix and cost controls. Reported PAT came in at Rs 15.5bn (+24/37% YoY/QoQ), which was above estimates.

Key takeaways: (1) Positive outlook on exports: In 3QFY21, the company witnessed the highest-ever exports at 687k units (+22% YoY, 53% of overall volumes) as it gained share across markets. Further, demand in most markets is now recovered to ~90% of pre-COVID levels - Africa was not as impacted by COVID, LATAM is at 80-90%, while the Middle East and Sri Lanka have recovered to normalised levels. Bajaj remains in the top-2 OEMs in most of the overseas markets it operates in. (2) Premium portfolio to drive domestic segment: Bajaj's market share in the premium category stands at over 50% YTD. Pulsar recorded the highest-ever sales, driven by the 125cc. The OEM is investing in its 250cc super premium with its three brands - the Dominar, KTM and Husqvarna. This will be further supplemented with Triumph. Bajaj is investing in a new capacity in Chakan for its premium portfolio. (3) 3W sales are likely to witness an improvement over FY22 - sales are expected to improve as financing picks-up and the environment normalises (as cities open-up).

Maintain BUY: We increase our FY21/22/23E EPS by ~6% to factor in the higher-than-expected margins in 3QFY21. We value the stock at 20x on FY23E EPS (at a 10% premium to its long-term average trading multiple to factor in the improving outlook) and set a revised target price of Rs 4,250. Key risks: Any further COVID-related lockdown on the downside.

Shares of BAJAJ AUTO LTD. was last trading in BSE at Rs.4151.05 as compared to the previous close of Rs. 4166.2. The total number of shares traded during the day was 54671 in over 6085 trades.

The stock hit an intraday high of Rs. 4237.2 and intraday low of 4107.05. The net turnover during the day was Rs. 228696548.

Source : Equity Bulls

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