MOSL: BAJAJ AUTO (Buy)-Back on recovery path- Volume growth coupled with improving mix to drive margin expansion

​BAJAJ AUTO: Back on recovery path; Volume growth coupled with improving mix to drive margin expansion

(BJAUT IN, Mkt Cap USD14.5b, CMP INR3262, TP INR4197, 29% Upside, Buy)

Regulatory changes driving medium-term visibility in three-wheelers

• Regulatory changes in key states where BJAUT enjoys over 90% share are opening up an incremental opportunity of ~142k passenger 3Ws (v/s sales of 240k in FY17).
  
• Average monthly volumes in FY18YTD have improved to ~24.7k (v/s ~21.1k/month in FY17). Strong domestic demand coupled with recovery in 3W exports is leading to capacity constraints for BJAUT in the 3W business.
  

Plugging portfolio gaps leading to recovery in domestic motorcycle volumes

• With over 60% of economy segment customers preferring electric start (ES), the recent launch of ES variants has led to recovery in this segment. Average volumes have improved to ~82.9k/month in FY18YTD v/s ~69.7k in FY17.
  
• Also, there are initial signs of recovery in the premium segment with Pulsar 160 NS, though sustenance of these volumes is key.
  
• BJAUT is addressing product issues in V series, and launching new variants in Avenger and a new brand in the 125cc commuter segment by 4QFY18.
  

Stability in key markets, ramp-up in new markets driving revival in exports

• Motorcycle exports to Nigeria have rebound to 23k-26k in the last two months from recent lows of 8k (in April 2017). Increasing share of new/ nascent markets, which now constitute 16% of exports, would dilute dependency on Africa and improve export mix.
  
• Exports have grown 9.4% in FY18YTD, with average monthly volumes at 135.3k (v/s 117.6k in FY17). Recovery is visible in both 2Ws (+8.3%) and 3Ws (+15.4%). We estimate ~14% exports CAGR over the next three years.