Reliance Research - Bajaj Auto - 2QFY23 Result Update - Strong Performance; Upgrade to BUY on Attractive Valuation

Mr. Mitul Shah, Head of Research at Reliance Securities

Bajaj Auto (BJAUT) delivered a healthy operating performance, with EBITDA margin of 17.2% (24bps above our estimate of 17%), on the back of an improved realization, better mix and favorable exchange rate. Revenue grew by 16% YoY (+28% QoQ) to Rs102bn (3.6% above our estimate of Rs98.5bn), on the back of ASP growth (+16% YoY/+3% QoQ) to Rs88,640 and volume growth (+1% YoY/+23% QoQ) to 11,51,012 units. Its EBITDA margin expanded by 125bps YoY (+104bps QoQ) to 17.2% vs. our estimate of 17%, due to better control on employee cost and Other expenses in addition to higher realisation. BJAUT's reported Adj. PAT was Rs15.3bn (+20% YoY/+30% QoQ), vs. our estimate of Rs14.6bn. We believe that the better product mix, higher realization, market share gain in domestic market, reviving 3W business coupled with a favorable exchange rate would support BJAUT's margins, despite the subdued exports. We downgraded BJAUT in 1QFY23, while it corrected by ~14% from its recent peak providing attractive valuation of 14.2x FY24E now. In view of the healthy domestic volumes, recovery in high-margin 3W business, likely sequential improvement in exports from current level, improving return ratios, strong balance sheet and attractive valuation post recent price correction, we upgrade BJAUT to BUY from SELL with a revised 1-year Target Price of Rs4,000 (vs. earlier 3,750).

Exports to Decline but Strong Domestic Sales Revival in FY23E

We expect the domestic 2W industry to recover steadily in ongoing festival and BJAUT would witness market share improvement with better supply of components in 3QFY23. On the export front, we believe that geopolitical issue led to sharp run up in crude, commodity and food grain inflation in the export market indicating blink outlook for exports over near to medium term. Therefore, we expect BJAUT's export to decline by 15% in FY23E. However, we believe that export has bottomed out and it would improve sequentially 3QFY23 onwards post rationalising channel inventory in company's key export markets. This coupled with favourable exchange rate would expand margins going forward. We estimate its EBITDA margin expansion of 100bps and 30bps YoY to 16.9% and 17.2% in FY23E and FY24E respectively.

Outlook & Valuation

We expect BJAUT's domestic volume to witness a growth of 28% in FY23E, while exports would decline by 15%. We increase our volume by 3% each for FY23E/FY24E due to strong domestic volumes and market share gain. Considering higher realisation and favourable exchange rate, we increase by revenue estimates by 7% each for FY23E/FY24E. We increase our EBITDA estimates by 10% each for FY23E/FY24E due to stable RM cost and operating leverage. Accordingly, we increase our PAT estimates by 7% each for FY23E/FY24E. In view of the healthy domestic volumes, higher realization, better mix, strong cash flows and attractive valuation at 14.2x FY24E earnings post recent price correction, we upgrade BJAUT to BUY from SELL with a revised Target Price of Rs4,000, valuing the stock at an unrevised P/E multiple of 16x FY24E EPS, and adding Rs200/share for the stake in subsidiary, PMAG (holding company of KTM).

Source : Equity Bulls

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BajajAuto Q2FY23 ResultUpdate RelianceSecurities RelianceResearch