MOSL: BAJAJ AUTO (Neutral)-In-line-industry dynamics challenging; expects margin to stabilize at 15-16%
Bajaj Auto: In-line; industry dynamics challenging; expects margin to stabilize at 15-16%
(BJAUT IN, Mkt Cap USD11b, CMP INR2619, TP INR2900, 11% Upside, Neutral)
- Weaker mix, higher cost impact profitability: Revenues grew 4% YoY to INR77.5b (our estimate: INR75.7b). Despite the weak mix, realizations were flat QoQ (+2.2% YoY) at INR62k/unit (our estimate: INR60.7k) due to favourable FX and price increases for ABS. EBITDA margin shrank 250bp YoY (-110bp QoQ) to 15.4% (our estimate: 15.5%) due to the weaker mix and higher other expenses (higher marketing and CSR spend), partly offset by currency tailwinds. Higher other income and lower depreciation led to adj. PAT growth of 1% YoY to INR11.3b (our estimate: INR10.8b).
- Management commentary: (a) Jul'19 trend for domestic motorcycles has been weaker than in Jun'19. (b) BJAUT expects the EBITDA margin to have bottomed out and stabilize at 15-16%. Focus on market share gain is through differentiated products and not pricing. (c) It will be launching 125cc motorcycle in next one month, with an objective to gain share from the 100cc executive segment. (d) Dealer inventory at 7-8 weeks. Company isn't aggressively looking to cut inventory as the festive season is round the corner. (e) 2W exports for BJAUT are expected to grow at 7-8%, whereas 3W exports are likely to decline in FY20 (due to Egypt).
- Valuation view: BJAUT's strategic shift of prioritizing market share over margin is reflecting in substantial market share gain in domestic motorcycles (+300bp in FY19), albeit at the expense of margins (-270bp in FY19). With the 12-month outlook appearing challenging due to current headwinds and the upcoming BS6 transition, we estimate a subdued EPS CAGR of 4.5% over FY19-21. Valuations at 15.9x/14.5x FY20/21 consol. EPS are a fair reflection of the tepid earnings growth expectation. Maintain Neutral with a target price of INR2,900.
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.
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