Maintain BUY on Bajaj Auto - Laying the ground for future technologies - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

While Bajaj Auto's Q1FY22 margin (down 260bps QoQ) was below our estimate due to reduced operating leverage, we expect margins to improve from here on as domestic volumes increase. Further, Bajaj will benefit from its presence in the overseas markets, which account for ~50% of volumes. The company is working on future technologies and forming a 100% subsidiary to address electric mobility. Further, it has extensive tie-ups with international majors like KTM & Triumph and inhouse R&D capabilities. We maintain BUY with a target price of INR 4,575 (at 20x Jun-23E EPS) as we are confident on its product development capabilities across technologies (ICE, CNG and EVs) and diverse presence in the 2Ws and 3Ws space. However, we are reducing our estimates for FY22-24E by ~7% to factor in the Q1FY22 results.

Q1FY22 financials: Total volumes declined 14% QoQ, owing to state-wise lockdowns. The average realisation, at ~INR 73k, grew 6% YoY (remained flat QoQ) due to price hikes, richer model mix, and higher exports (64% vs 57/54% YoY/QoQ). EBITDA margin, at 15.2%, disappointed, and was lower by 260bps QoQ due to commodity cost pressures (RM ratio at 73% vs 67/72% YoY/QoQ). It was partially offset by higher USD realisation and improved mix. Reported PAT came in at INR 10.61bn (-20% QoQ).

Key takeaways: (1) Margin outlook: Higher commodity costs impacted the EBITDA margin by ~3% in Q1, 1.5% of which the company was able to recover through cost pass-through to customers. Also, ~1% offset came from better forex and improved mix. (2) Near-term demand: Export volumes are at ~200k units/month and are expected to improve as more countries open. While domestic retail demand will improve QoQ, the built-up system inventory will result in wholesales trailing retail sales in Q2FY22. 3W sales were impacted in Q1FY22, but the OEM witnessed good retail in Jun-21. (3) Alternative technologies: The company has decided to form a 100% subsidiary for manufacturing EVs/hybrids. It will launch products as the market expands over the next 3-5 years. The transition from CNG-powered 3Ws (to electric) is not easy as the government is increasing the CNG footprint (~9k CNG pumps by 2025) and CNG is INR 1.25/km cheaper than diesel variants.

Shares of BAJAJ AUTO LTD. was last trading in BSE at Rs. 3846.75 as compared to the previous close of Rs. 3852.6. The total number of shares traded during the day was 18168 in over 2679 trades.

The stock hit an intraday high of Rs. 3924.8 and intraday low of 3826.45. The net turnover during the day was Rs. 70220700.

Source : Equity Bulls

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