Report
Deepak Jain

Bajaj Auto's Q3FY18 results (Underperformer) - Operating results inline; pressure points persist

Q3FY18 results

  • PAT disappoints; Operating performance broadly in line: Bajaj Auto’s Q3FY18 adjusted PAT at Rs 9.5bn (up 3% yoy) was ~8% below consensus estimates. While the operating income was broadly in line, the PAT was impacted by  a higher than anticipated tax rate and a  sharp decline in other income
  • Other expenses rise; Lower other income dents PAT growth: Revenues at Rs 63.7bn (up 26% yoy) reflected the volume trend (up 18% yoy)-realizations improved on a sequential basis by ~3% (on a better product mix with a higher share of 3 wheelers). The EBITDA margins at 19.3% (down 130 bp yoy, down 40bp qoq) were ~40bp below consensus estimates. While the gross margins showed a positive movement (up 70 bps qoq) to reflect the higher share of 3W/Exports in the product mix, this was offset by a significant increase in other expenses (up 100 bps qoq), on higher logistic costs and one time software license expense(Rs 200mn) .The other income declined by 29% yoy on account of mark to market capital loss on rising rates.
  • Concall Highlights: (a) It guided for FY18 exports and 2Wss at 1.65mn units (+17% yoy) and 3.5mn units (+7% yoy) respectively. Export segment has stabilized with management guiding for 10-12% growth in FY19 while it expects a 5% growth in CVs for FY19 driven by permits in Delhi and Maharashtra.(b) Management guided for 8-10% industry motorcycle growth in FY19.(c) It expects RM costs to harden on commodity costs pressures in 4QFY18.(d)It has taken a price hike of Rs 1000 in 3Ws in 3QFY18. (e)Export growth to be driven by revival of Nigeria and entry to Philippines, Cambodia in FY19. (f) It has targeted a run rate of 45k/month units from refreshed Discover by March-18 and 30k/month run rate for domestic 3Ws in FY19.

Key positives:  Higher gross margins

Key negatives: Lower other income and higher expenses and tax rate

Impact on earnings: No major change in earnings estimates.

Valuations & view

Bajaj Auto’s domestic portfolio continues to weaken with new products/brands (Avenger, V, Dominar) failing to enthuse consumers. The increased in discounts in the industry seem to reflect higher competitive pressures. In the near term while the exports/3W are likely to report growth on a low base/opening of permits, they are likely to remain volatile. Moreover, rising commodity costs could be an additional pain point. Maintain Underperformer with a target price of Rs 2,900 (17X Sept19E EPS and Rs 120 for the KTM stake).

Underlying
Bajaj Auto Limited.

Bajaj Auto is an auto-manufacturing company which is based in India. Co. is engaged in the manufacturing, selling, and exporting of two- and three-wheeler vehicles and spare parts and accessories. Co.'s products include scooters, motorcycles, and mopeds, as well as autorickshaws, such as goods carriers, delivery vans, and passenger carriers. Co. also provides related spare parts and after sales service. Co. offers its products through a network of dealers and maintains a presence in over a dozen countries in Europe, Latin America, the U.S. and Asia.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Deepak Jain

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