Bajaj Auto's Q1FY20 results (Underperformer) - Inline quarter; stress visible

Q1FY20 results

• PAT beats estimates: Bajaj Auto reports Q1FY20 PAT at Rs 11.2bn (up 1% yoy) was ~7% above our estimates on account of higher other income and lower tax rate. Operating performance adjusted for accounting policy changes was broadly inline with estimates.
• Revenues improves; EBITDA margin boosted by change in accounting policy: Revenues at Rs 77.6bn (up 4% yoy) were 3% ahead of estimates as realisations improved on ABS/CBS led price hikes. This negated a weaker product mix (lower share of 3Ws in portfolio) and high discounts. Reported EBITDA margins at 15.4% (down 250 yoy; 110bps qoq) was 20bps above expectations. The margins though were flattered by an accounting policy change (reclassification of other income/expenses into other operating income) that may have boosted margins by an estimated Rs800mn or ~90bps. While gross margins showed a sequential improvement (-54bps qoq) on lower commodity costs, this was offset by negative operating leverage (employee/other expenses rose by 130bps qoq). Adjusted EBITDA at 11.1 bn declined by ~11% yoy. PAT at Rs11.2bn (flat yoy benefitted from higher other income and a lower tax rate.
• Concall Highlights: (a) The management indicated that it expects the EBITDA margins to be range bound at current levels for the year. (b) It expects USDINR to be stable for medium term and have hedged about 50% of the exposure and commodity costs ease. (c) Inventory stands at ~8 weeks significantly higher than the 4-5 weeks. (c) International market sales to grow at current rate with major contribution from ASEAN countries. Latin America (d) Q1FY20 had high advertisement expenses on account of CV campaign in international markets.

Key positives: Higher than expected other income

Impact on earnings: We cut our FY20/21 estimates by ~7%/5% to account for lower volume growth/lower margins.

Valuations & view

The company’s strategy of cutting product prices in order to gain market share may benefit it over the longer term. However, in the near to medium term the dilution in margins continue to outweigh benefits from volume growth. We believe price cut led marketshares may have run their course and volume growth could be more sedate in FY20.  The risk of a potential slowdown in volumes due to regulatory price hikes (insurance/ABS/BSVI) continues to persist, we remain cautious on the space. Maintain Underperformer with a target price of Rs2400 (15x21E EPS). Key upside to our view would be a stronger than expected growth in the export markets.