Bajaj Auto's Q2FY20 results (Underperformer) - Strong quarter; concerns persist

Q2FY20 results

• PAT beats estimates: Bajaj Auto reports Q2FY20 PAT at Rs 14bn (up 22% yoy) was well ahead of estimates. The beat reflects a stronger than expected operating performance and a reversal in the tax rate.
• Sharp improvement in gross margins: Revenues at Rs77bn (down ~4% yoy) were 5% ahead of estimates with favourable product mix (higher share of 3Ws/higher priced products). The gross margins showed sharp improvement (120bps qoq, 200bps yoy) which reflects the higher share of 3W/exports in the mix. In addition, the gross margins likely improved due to an increase in company level finished goods inventory – this benefit could reverse in the coming quarters. The improvement in gross margins was partly offset by higher other expenses. Overall, EBIDTA margins at 16.6% (up 115bps qoq; down 23bps yoyn 250/110bps yoyfrom ASEAN countriesith m and have hedged about 50% of the exposuresal use to come in other income now both a;) was ~200/~100bp ahead of our/consensus estimates. While PBT declined by ~3% yoy, PAT reported a growth of 22% yoy on account of a tax reversal.
• Concall Highlights: (a) The management expects the EBITDA margins to be a function of the relative share of each product segment in total sales –if the share of domestic motorcycles rise, it could lead to lower margins. (b) The decline in domestic sales may have bottomed out during mid-festive season, however, complete recovery is expected to take some more time. The volumes in the festival season till now have been flat to mildly negative. (c) Exports to Egypt are expected to revive by the end of the quarter with an average of 3000 vehicles/month. (d) Discounts during the festival season are similar to last year (e) Bajaj finance accounted for 50% of financed vehicles even as the share of vehicle penetration rises.

Key positives: Higher than expected realisations and low RM cost

Key negatives: Higher other expense

Impact on earnings: We raise our FY20/FY21 estimates by ~9%/6% to account for a lower tax rate and lower revenue growth.

Valuations & view

In the near term, Bajaj Auto with its high share of exports (~40% of total revenues) is better placed than its peers to weather the slump in the domestic market. However, we continue to have concerns with the company’s weakening domestic motorcycle portfolio, the potential disruption from electric 3Ws and the impact of BSVI on volumes. The current valuations at ~19xFY21 are not comforting. Maintain Underperformer with a target price of Rs2900 (17XFY21 EPS).