MOSL: BAJAJ AUTO (Buy)-Operating performance in line as better mix dilutes higher other expenses

Bajaj Auto: Operating performance in line as better mix dilutes higher other expenses

(BJAUT IN, Mkt Cap USD14.4b, CMP INR3178, TP INR4031, 27% Upside, Buy)

• Favorable mix drives realization growth of ~4% QoQ: Net sales increased 25.7% YoY (-3.2% QoQ) to INR63.7b (est. of INR62.1b), as volume grew 17.6% YoY (-6.5% QoQ). Realization improved by 3.6% QoQ (+6.9% YoY) to INR63.6k (est. of INR62k) due to a favorable mix (higher share of 3W, exports).
• EBITDA margin miss led by higher CSR, one-time expense: EBITDA grew 18% YoY to INR12.3b (in-line), implying an EBITDA margin of 19.3% (-130bp YoY, -40bp QoQ; est. of 20%). Higher CSR spend (INR280m) and one-time expense related to new SAP licenses (INR200m) resulted in higher-than-estimated other expense, driving an operating performance miss. Lower other income (due to MTM loss of INR800m) and consequently a higher tax rate (31% v/s est. of 29%) restricted PAT to INR9.5b (+3% YoY, -14% QoQ; est. of INR10.5b).
• Management commentary: (a) Expects domestic motorcycle industry growth of 8% in FY19. (b) BJAUT exports to grow 10-12% in FY19; spares revenue to grow 10% in FY19. (c) Expects 3W volume growth of 5% in FY19; demand momentum in domestic market to continue till Jul-18. (d) New Discovers and Avengers launched in Jan-18; another launch from Avenger family within a fortnight. (e) Expects domestic motorcycle market share to inch up to 21% in Mar-18 (v/s 16.4% in 3Q) led by new launches, (f) Nigeria volumes have bounced back, with sales of 33k units in Jan-18; expects growth of 10-12% going ahead.