Bajaj Auto - Multiple favourable levers drive margin surprise - ICICI Securities

Bajaj Auto's (BJAUT) Q4FY22 EBITDA margin came in at 17.1% (up 191bps QoQ) vs our estimate of 15.6%, with gross margin up 282bps QoQ despite adverse input material costs. Better export mix (~60%), price hikes (~1%), higher 3W / premium model mix supporting higher ASP (up 7% QoQ) drove gross margin expansion, we believe, despite under-recoveries against commodity inflation. Flattish exports QoQ and deferral of RM cost pass-through to Q1FY23 are likely to impact near-term gross margin as, despite price hikes in Q4 (~1%) and April (~2%), BJAUT would still face under-recovery against commodity inflation. Domestic 3W grew 15% YoY with strong market share gains in CNG segment (77% share). We look forward to launch of new variants of Pulsar amidst 2W market recovery from H2FY23E, with base effect coming in and TCO stabilising. We don't see EV as a major growth driver or obstacle in FY23E/FY24E for BJAUT. Downgrade to REDUCE from Hold; the stock is trading at ~16x (implied target P/E at 14x) FY24E EPS vs next 10-year earnings CAGR of ~9% (~5.5% FY24E dividend yield).

- Key takeaways from earnings call: a) Export revenue crossed US$2bn in FY22 with market share gain of 2% across key regions of Africa, LatAm and Asia; b) limited availability of chips resulted in focus on premium bikes leading to mix of CT/Platina falling by 1,200bps to 37% in domestic portfolio and mix of premium bikes in exports increasing by 300bps QoQ to 21%; c) despite 1% and 2% price hikes in Q4 and Q1FY23, BJAUT is still facing ~300bps of under-recovery, which seems tough to get balanced by favourable mix in Q1FY23. Thus, further price hikes (depending on market acceptance) and raw material reversal are key for margin sustenance for the near term; d) as against a year back when 2W export shipments were much higher than retails, the case now is reverse with retails touching record highs and wholesales stagnating for past six months and likely to remain so till H1FY23; e) ~60bps increase in reported EBITDA margin was a one-off led by state government incentives and actuarial MTM adjustments; f) company is not in a hurry to scale up e-3W post launch in next couple of months and will wait to see range anxiety, charging issues, resale value and robustness/longevity of vehicle issues getting addressed.

- Downgrade to REDUCE: We expect revival in the domestic 2W market post ~35% decline in FY19-FY22E along with domestic 3W recovery as education institutes and offices approach normalcy. We build-in 9%/16% volume/earnings CAGRs in FY22-FY24E with mean EBITDA margin of ~16% (Q4FY22 at 17.1%). Our DCF-based target price for BJAUT implies ~14x FY24E core EPS with KTM AG value at Rs111/share and cash at Rs800/share. Our revised TP is Rs3,586 (earlier: Rs3,575). Downgrade to REDUCE from Hold with ~7% potential downside.

Shares of Bajaj Auto Limited was last trading in BSE at Rs. 3727.05 as compared to the previous close of Rs. 3833.50. The total number of shares traded during the day was 12566 in over 1930 trades.

The stock hit an intraday high of Rs. 3838.00 and intraday low of 3712.35. The net turnover during the day was Rs. 47554415.00.

Source : Equity Bulls

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BajajAuto INE917I01010 Q4FY22 ResultUpdate ICICISecurities