Bajaj Auto: Encouraging outlook says HDFC Securities, Maintain BUY with Rs 4250 target price

Bajaj Auto’s Q3 FY21 PAT (+24/37% YoY/QoQ) beat was driven by strong profitability (EBITDA margin came in at 19.4%, +150/170bps YoY/QoQ). HDFC Securities have recently upgraded Bajaj Auto to a BUY on the back of a firming recovery. Bajaj Auto’s management expects double-digit growth in FY22 in the domestic 2W market while export demand will remain healthy, driven by low-system inventories. Further, the local 3W volumes are expected to improve from hereon.
 
Bajaj Auto maintains BUY rating, given:
 
(1)   Bajaj Auto’s exports are firm across frontier markets as crude prices and other commodities are firming up
(2)   Bajaj Auto’s 3W sales are expected to revive, particularly after the vaccine rollout
(3)   After Bajaj Auto has finalised its agreement with Triumph, it is building a new facility in Chakan to increase production for premium vehicles
 

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Bajaj Auto Q3 FY21 Financials: Total volumes grew 9/24% YoY/QoQ. Export volumes witnessed strong growth at 22% YoY as international markets are now opening up. Realisations at Rs 68k improved 7% YoY, owing to BSVI cost pass-on to the customers and higher share of exports in the mix (53% vs 47/46% YoY/QoQ). Bajaj Auto revenue grew 17/25%. EBITDA margin at 19.4% came in at a multi-quarter high (+150/170bps) owing to a rich product mix and cost controls. Reported PAT came in at Rs 15.5bn (+24/37% YoY/QoQ), which was above estimates.
 
Bajaj Auto: Key takeaways
 
(1) Positive outlook on exports: In 3QFY21, Bajaj Auto witnessed the highest-ever exports at 687k units (+22% YoY, 53% of overall volumes) as it gained share across markets. Further, demand in most markets has now recovered to 90% of pre-Covid levels. Africa was not as impacted by COVID, LATAM is at 80-90%, while the Middle East and Sri Lanka have recovered to normalised levels. Bajaj Auto remains in the top-2 OEMs in most of the overseas markets it operates in. 
 
(2) Premium portfolio to drive domestic segment: Bajaj Auto market share in the premium category stands at over 50% YTD. Pulsar recorded the highest-ever sales, driven by the 125cc. The OEM is investing in its 250cc super premium with its three brands - the Dominar, KTM and Husqvarna. This will be further supplemented with Triumph. Bajaj Auto is investing in a new capacity in Chakan for its premium portfolio. 
 
(3) 3W sales are likely to witness an improvement over FY22 – Bajaj Auto sales are expected to improve as financing picks-up and the environment normalises (as cities open-up).
 
Maintain BUY: HDFC Securities increased their FY21/22/23E EPS of Bajaj Auto by ~6% to factor in the higher-than-expected margins in 3QFY21. HDFC Securities valued the stock at 20x on FY23E EPS (at a 10% premium to its long-term average trading multiple to factor in the improving outlook) and set a revised target price of Rs 4250. 
 
Key risks: Any further Covid-related lockdown on the downside.