Bajaj Auto - Perfectly priced amid headwinds galore - ICICI Securities

Since its Q3FY22 result, Bajaj Auto (BJAUT) has outperformed NIFTY50 by ~15% amid worsening outlook on profitability, rising fuel prices and flattish demand outlook in key export markets. Though we keep our FY23E revenue estimates largely unchanged, we trim FY23E EBITDA margin by ~300bps to ~14.5% due to surge in RM costs, resulting in 2% cut in FY24E earnings. Though recent cost inflation would get partially reflected in Q4FY22, bulk of it would come Q1FY23E onward. We continue to build-in 12% domestic motorcycle volume CAGR in FY22E-FY24E with market share at 18.5%. With key 2W overseas markets either showing static demand or a declining bias, we expect BJAUT's 2W export volumes to grow at 8% CAGR in FY22-FY24E. Cost of key input commodities like steel, aluminum and plastic/polymer has increased by 15-40% QoQ and blended RM/unit in Q3FY22 was at ~Rs57k. A ~15% increase in RM basket cost would require a price hike of ~Rs9k/unit, to keep gross profit/unit neutral. We downgrade the stock to HOLD from Add, with an unchanged DCF based target price of Rs3,575, implying 15.5x FY24E core earnings, Rs785/share cash and Rs130/share value of stake in KTM entity.

- Rise in commodity basket cost to hurt FY23E profitability post a weak FY22: In CY22-TD, key input commodity costs (steel aluminium, plastic/polymer, etc.) have increased by ~15-40%, not factoring-in the inflated power/fuel costs impacting conversion costs and logistics costs. Our analysis suggests a 15% increase each in RM basket cost and in power/fuel costs warrants ~Rs9k-10k/unit price hike on a blended basis to keep gross profit/unit neutral. This in turn would hurt gross margin by ~250bps, though per unit profitability would remain same. Thus, we reduce our FY23E EBITDA margin estimate by ~300bps to ~14.5%, similar to FY22 levels.

- Revenue estimates largely unchanged with slight cut in volumes being balanced by rise in ASP: On a benign FY22E base, we continue to build in ~12% volume CAGR in BJAUT's domestic 2W portfolio in FY22-FY24E, with market share at ~18%. Key export markets for 2Ws are showing signs of consolidation in the past 4-5 months, with volumes either stabilising or declining. Post ~23% volume growth in FY22E 2W exports, we estimate ~8% CAGR in FY22-FY24E. On a benign base with covid impact gradually waning, we expect ~35% volume CAGR in domestic 3Ws vs 8% for export 3Ws in FY22-FY24E. We have cut overall volume estimates for FY23E/FY24E by ~2% and increased ASPs by ~3%, to pass on commodity inflation (thus maintaining revenue estimates largely similar).

- Expect ~8% CAGR in 10-year earnings with limited triggers to push growth: Past 5yr/10yr earnings CAGR for the company has been ~3.5%/4%, with EBITDA margin declining from ~20% levels to 15%. For next 10 years, we are building-in ~8% earnings CAGR, assuming profitability to bottom out in FY23E at 14.5% and stabilising at ~17%. Our DCF valuation of BJAUT at Rs3,575 factoring-in 4.5% terminal growth rate and 12% WACC, which implies 15.5x FY24E core P/E, on which we see limited upside.

Shares of Bajaj Auto Limited was last trading in BSE at Rs. 3738.10 as compared to the previous close of Rs. 3652.50. The total number of shares traded during the day was 7644 in over 1119 trades.

The stock hit an intraday high of Rs. 3746.20 and intraday low of 3647.55. The net turnover during the day was Rs. 28326766.00.

Source : Equity Bulls

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