MOSL: BAJAJ AUTO (Buy)-Operating performance in-line-Domestic mix unlikely to deteriorate further

Bajaj Auto: Operating performance in-line; Domestic mix unlikely to deteriorate further

(BJAUT IN, Mkt Cap USD9.8b, CMP INR2478, TP INR3196, 29% Upside, Buy)

• CT100-led growth leads to second straight quarter of realization decline: Net sales grew 21.4% YoY (+7.6% QoQ) to INR79.9b (in-line), as volumes increased by 25% YoY (+9.2% QoQ). Realization declined for the second consecutive quarter by 2.9% YoY (-1.4% QoQ) to INR59.6k/unit (in-line) due to an unfavorable product mix (share of Economy segment at 58% v/s 50% in 1QFY19). Spare sales increased by 20% QoQ to INR8.1b in the quarter.
• EBITDA margin impacted by adverse product mix: Gross margin came in at 27.6% (our estimate: 28%), impacted by an adverse product mix. EBITDA grew 3% YoY to INR13.4b (in-line), implying an EBITDA margin of 16.8% (-290bp YoY, -50bp QoQ; in-line). Higher other income boosted PAT to ~INR11.5b (+4% YoY; our estimate: ~INR10.7b). For 1HFY19, revenue/EBITDA/PAT grew 28.1%/17.3%/10.2%, implying residual growth of 15.1%/-0.7%/3.5% in 2HFY19.
• Management commentary: (a) Expect domestic motorcycle industry growth of 8-9% in FY19; BJAUT to grow at 10-15%. (b) USDINR at 69.4 in 2QFY19 (v/s 67.4 in 1Q); expected to be ~70 in 2HFY19. Only ~10% of FY20 FX exposure hedged at ~73.5 (this can contribute ~2pp to FY20 margins). (c) Domestic motorcycle mix unlikely to deteriorate further, as growth in Pulsar, Platina and upcoming 125cc products would drive mix improvement. (d) Pulsar – strong demand for twin disc brake variant (~40% of Pulsar volumes). (e) Have taken price increase of INR500-1,000 in motorcycles and INR1,500-3,000 in 3Ws in Oct-18.