Reduce Bajaj Auto; target of Rs 3204: Dolat Capital

Dolat Capital's research report on Bajaj Auto

Bajaj Auto reported a decent performance in Q1FY21 amid turbulent times led by cost control measures and favorable FX movement. EBITDA fell 66% YoY to Rs 4.09bn (vs est Rs 3.88bn) with margin at 13.3% (vs est 11.96%) led by 60% fall in revenue. The management is hopeful for a quick recovery in 2Ws aided by increasing preference for personal mobility and improvement in rural sentiments. Motorcycle demand is back to 80-85% of normal levels in July for domestic markets. There are initial signs of recovery in export with demand back to 75-85% of normal levels. Nigeria sales are back to 75% while Philippines and Colombia are at 80% of normal levels for motorcycles. While the timing for full fledge recovery may be uncertain, we believe Bajaj Auto will be one of the biggest beneficiaries in the export markets over the medium term due to lower penetration of 2W in African market and increased preference of personal mobility Gross margin improved in Q1 (+133bps QoQ) due to price hike, a better geographic mix (high export) and FX benefit. However, reversal in commodity prices and INR appreciation to put pressure on margins in Q2. The company has taken several cost control measures and curtailed marketing & adv spends while keeping employee costs intact.

Outlook

We maintain our positive stance given 1) improving outlook for domestic and export 2W segments owing to increasing preference for personal mobility, 2) operating efficiency and volume recovery to support EBITDA margin and 3) strong cash reserves. At CMP, the stock is trading at 17x/15x FY22E/FY23E earnings, which leaves little upside on the stock. We roll forward our valuation from FY22 to FY23E and value the stock Rs 3,204 (16x FY23E core EPS + cash + KTM stake).

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