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MOSL: BAJAJ AUTO: Better mix and higher other income drive beat on 1Q result (BJAUT IN, Mkt Cap USD14b, CMP INR3878, TP INR4200, 8% Upside, Neutral)

• Bajaj Auto (BJAUT)’s 1QFY23 beat was driven by better mix, favorable FX and higher other income. While near-term exports outlook has turned cautious due to macro headwinds, domestic demand recovery is on track along with alleviating supply-side issues. In EVs, BJAUT is ramping up sales of Chetak with a target to expand to 100 cities by end-FY23.
• We raise our EPS by 6%/3% for FY23E/FY24E, respectively, to factor in the favorable FX, price hikes, near-term export weakness and higher income. Maintain Neutral with a TP of INR4,200 (based on 16x Sep-24 Consol EPS).

 

Mix, FX and price hikes drive margins, higher other income boosts PAT

• BJAUT’s 1QFY23 revenue/EBITDA/PAT grew 8%/16%/11% YoY to INR80.05b/INR13b/INR11.7b, respectively.
• Net realizations improved 17% YoY and 5% QoQ to INR85.7k (est. INR82.5k) driven by favorable mix, FX and price hikes. Volumes declined 7% YoY.
• Gross margin improved 80bp YoY to 27.8% (est. 27%). The beat was fueled by higher realizations. EBITDA margin expanded ~100bp YoY to ~16.2% (est. 15.7%). EBITDA grew 16% YoY to INR13b (est. INR12.1b).
• Higher-than-estimated other income boosted PAT to ~INR11.7b (est. ~INR9.9b), a growth of ~11% YoY.
• Cash stood at ~INR205b as of Jun’22 (v/s ~INR190.9b as of Mar’22).
• Consolidation for Pierer Mobility (PMAG) will be henceforth done on a six months basis as required reporting frequency for PMAG is six months.

Highlights from the management commentary

• Export caution for near term: Devaluation of the currency (impacting retail prices adversely) and availability of USD is affecting a few export markets. BJAUT’s 2QFY23 exports will be soft as Africa is 50-55% of volumes, though demand in other markets remains good. FY23 export volume growth could be lower than the earlier planned 10% growth.
• Domestic recovery seen: Overall industry demand is showing signs of recovery on a QoQ basis, with urban market revival being ahead of rural market. Management expects domestic demand to grow up to 5% going forward, with >125cc doing better than 100cc.
• Supply-side issues normalizing: The ECU shortage had substantial negative impact in 1QFY23, with loss of production at 20-25% (40% in domestic, 10% in exports), impacting domestic retail market share by 2pp and inventory depleting to three weeks (v/s the norm of six weeks). It prioritized ECUs towards more profitable products. Management expects improvement in supplies from Jul’22 onwards and it has now started filling inventory.
• Commodity cost inflation to continue in 2QFY23: 1QFY23 saw commodity cost inflation of 3pp and the company expects 1-1.5pp QoQ increase in 2QFY23 as well, since metal price correction is being more than offset by inflation in crude derivatives and precious metals.

 

Valuation and view

• While near-term export outlook is negative, improving supplies will boost BJAUT’s market share in the domestic market. The market share would further benefit over the long term from: a) the premiumization trend, b) the opportunity in exports, and c) the potential sizeable position in the Scooter market via EVs. While the domestic 3W market appears to be on the recovery path, it is still vulnerable to a possible disruption from electrification.
• At 17.2x/15.5x FY23E/FY24E consolidated EPS, the stock’s valuation largely captures the expected recovery. BJAUT’s dividend yield of 4–5% and on-going buyback (~25% of targeted buy-back already done) would support the stock. We maintain our Neutral rating, with TP of INR4,200/share (16x Sep’24E consolidated EPS).