ADD on Bajaj Auto - Mixed outlook - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Bajaj Auto (Q1FY21 Results Review) - Mixed outlook. ADD

While the COVID lockdown in Apr-20 has impacted Bajaj Auto's 1Q PAT (- 53% YoY, -60% QoQ), the OEM has witnessed a sharp pick-up in 2W domestic volumes in Jun/Jul-20 with retail activity in the current month expected at 85% of normal levels. Further, exports are holding up better than expected as activity in most markets is between 75-100% of normal levels. However, the higher value 3W segment (over 20% of revenues) remains adversely impacted (20% of normal) and is unlikely to revive soon as school activity and office-related travel are yet restricted. We reiterate our ADD rating as the outlook remains mixed. We tweak our estimates lower by 3/1% over FY21-23E. We value the stock at 18x on Jun-22E EPS (at a 5% premium to the 10-year historic average trading multiple) and set a revised target price of Rs 3,120. Key risks: Extended impact of COVID on the downside and an increase in oil prices on the upside.

1QFY21 financials: Affected by COVID, volumes declined 64/55% YoY/QoQ. However, the average realisation grew 12/1% YoY/QoQ due to BSVI transition. Gross margins at 32.9% surprised positively (+460bps YoY) due to a higher contribution of exports (benefit of Rs 770mn as USD realisation was at Rs 75.6 in 1Q vs. Rs 72.1 QoQ). However, EBITDA margin was lower at 13.3% (-220/510bps YoY/QoQ) due to the adverse impact of operating deleverage. Reported PAT at Rs 5.2bn declined 53/60% YoY/QoQ.

Call and other takeaways: Export markets: In Jul-20, the demand for 2Ws is back at 75-80% of pre-COVID levels. Nigeria is currently at 75% of demand vs 50% in Jun-20. Markets like the Philippines, Bangladesh, and Egypt are reaching normal levels. Demand for 3Ws lagging: Internationally, demand for 3Ws is around 60-65% of normal levels. However, in India, the demand is yet muted and is at a mere 20% of normal levels. Others: The management believes that electronic injection technology is easier to service on entry-level bikes as compared to FI that is offered by the competition.

Shares of BAJAJ AUTO LTD. was last trading in BSE at Rs.2985.6 as compared to the previous close of Rs. 3004.35. The total number of shares traded during the day was 78198 in over 7972 trades.

The stock hit an intraday high of Rs. 3025 and intraday low of 2928.55. The net turnover during the day was Rs. 232319991.

Source : Equity Bulls

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