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Bajaj Auto: Retain ‘buy’ with unchanged TP of Rs 4,400

Bajaj’s 2W and 3W exports have averaged 204K in the last 12 months, 13% higher than FY20 despite the impact of Covid.

Key takeaway: Bajaj’s 1Q PAT declined 20% QoQ (6% below 1QFY20) but was in-line with JEFe. EBITDA fell 27% QoQ as volumes declined 14% QoQ while Ebitda margin contracted 260bp QoQ on higher commodity costs and lower volumes. Domestic 2W demand should recover from an abnormal cyclical trough while exports have held up well. Margin pressures should also peak out in 1HFY22. We cut FY22-23E EPS by a slight 2-4% but retain Buy with an unchanged Rs 4,400 PT.

In-line 1Q result: Bajaj’s 1Q volumes fell 14% QoQ (19% below 1QFY20) as the second wave of Covid took a big toll on domestic demand. EBITDA fell 27% QoQ but was just 7% below 1QFY20 and was in line with JEFe. 1Q gross margin contracted 120bps QoQ as commodity costs rose ~370bp QoQ but was largely offset by price hikes and better mix. 1Q EBITDA margin still fell 260bp QoQ, pulled down by adverse operating leverage impact. 1Q net profit was down 20% QoQ, just 6% below 1QFY20 and in line with JEFe.

Domestic demand recovering from Covid lows: Domestic 2W demand, although lagging passenger vehicles, is recovering from the second wave of Covid and we believe should see a cyclical rebound over the next two years from an abnormal trough. Bajaj expects industry retails to grow YoY in 2Q but wholesales to be flattish YoY as inventory levels are higher this year. Bajaj has gained 160bp market share in bikes in 1QFY22 backed by the recent launch of Pulsar 125cc; its share in 125cc+ segment is down 400bps in 1QFY22 though. Domestic 3Ws have been under severe pressure but even here demand is improving sequentially.

Exports doing well: Bajaj’s 2W and 3W exports have averaged 204K in the last 12 months, 13% higher than FY20 despite the impact of Covid. The firm said demand is holding up well except in certain markets in Asia and Africa due to Covid related lockdowns.

Margin pressures should peak out in 1H: Bajaj expects another ~3ppt QoQ increase in commodity costs in 2Q but has been able to offset about two-thirds of the impact through price increases. While 2Q gross margins should be down QoQ, we expect EBITDA margin to be flattish as higher volumes should drive operating leverage benefit.

Maintain Buy: We cut FY22-23E EPS by a slight 2-4% factoring lower volumes and margins. We still see 16% volume and 21% EPS CAGR over FY21-23E. Its 17x FY23 is reasonable and dividend yield to 4-5% should provide support. We maintain Buy but prefer TVS and Eicher over Bajaj in the 2W space. Out Rs 4,400 PT is based on 18x FY23 PE.

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