Bajaj Auto Share price: HSBC retains Buy rating and lifts target price to Rs 4000 from Rs 3500

Bajaj Auto Share price: Bajaj Auto reported an EBITDA margin of 19.8% (excluding CSR expenses), exceeding consensus yet again (seventh consecutive time) and showcasing its earnings resilience. Admittedly, the contribution from the high-margin exports business was strong in 3Q. However, the weakness in Bajaj Auto 3W sales (which is a higher-margin business) and increase in input costs did little to suppress profitability. Strong strategic execution (recent product actions) helped to drive customer preferences towards higher-spec motorcycles (MC), resulting in a better product mix, which helped Bajaj to post its highest-ever quarterly profit in Q3.

The further widening of Bajaj Autos leadership position in many markets clearly underscored to its strong local insights and presence built over the years. HSBC believes Bajaj Auto has strengthened its foundation, allowing it to benefit from the robust long-term growth opportunities in these underpenetrated markets.

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Bajaj Auto’s see multiple triggers in the medium term that are not yet in the price. First, successful new products in partnership with the Triumph and Husqvarna brands should be significantly value accretive and buoy investor sentiment. Bajaj has already seen tremendous success with KTM. Second, HSBC expects Bajaj Auto recovery in 3Ws could be faster than the consensus expectations as mobility normalises with schools, colleges and offices opening up in the next few months.

HSBC factors in domestic 3W volume growth of 95% yoy for FY22. For the medium term, we expect Bajaj to be aggressive in the eRick and e3W markets and not lose its leadership positions. Bajaj Auto’s ramp-up in the e2W market is an opportunity to gain market share and come back in the scooter market, which has been a miss for Bajaj Auto for the past 15 year.
Retain Buy on Bajaj Auto and increase target price to Rs 4000 from Rs 3500:

For the near term, we factor in the impact of commodity price increases and mix normalisation into forecasts. Strong exports by Bajaj Auto and margin execution underpin the upward revisions to our long-term growth assumptions in our DCF-based valuation. Resilient and diversified business of Bajaj Auto, in HSBCs view, warrants an upward rerating, supporting our Buy rating and driving the increase in our target price. HSBCs Bajaj Auto target price implies a PE of 17x for FY23e (ex-KTM), which looks undemanding vs the NIFTY and peer averages.