PL Stock Report - Bajaj Auto (BJAUT IN) - Q1FY24 Result Update - Inferior mix to curtail margin expansion - REDUCE

Bajaj Auto (BJAUT IN) - Himanshu K Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: REDUCE | CMP: Rs4,839 | TP: Rs4,575

Q1FY24 Result Update - Inferior mix to curtail margin expansion

Quick Pointers:

♦ Potential impact on margins from inferior mix.

♦ Exports recovery to be gradual.

We marginally increase our FY24/25 EPS estimates by 2-3% to factor beat in margins and management commentary. Bajaj Auto (BJAUT) 1Q revenue (Rs. 103bn) was largely in-line, while EBITDA margin (19.0%) was higher than PLe (18%) but in-line with street estimates (19%). EBITDA margins saw slight decline QoQ on de-inventorisation, inferior mix and better vehicle mix, offset by higher operating leverage. However, strong cost control of employee expenses and other operating expense, shielded from a steeper decline. Export volumes recovered QoQ and BJAUT is expecting gradual improvement, given macro challenges in those markets. The company will also face increasing pressure from inferior mix as the export portfolio from African regions begins to increase (higher mix of low margin products) plus increase in EV volumes and margins are likely to remain at current levels. 2Q volumes in domestic market could be soft due to high base.

We expect BJAUT’s domestic premium segment volumes to grow (similar to the industry) helped by premiumisation trends besides fast ramp-up of EVs could make us turn constructive on the stock. BJAUT is currently trading at 17.4x FY25, on the higher side versus history. Maintain ‘REDUCE’ with a TP of Rs 4,575 (Rs 4,450 earlier) at 16x Mar-25E EPS.

In line revenues; beat on margins: Revenue grew by 28.8% YoY, on volume growth of 9.3% and came in-line with our and slightly below Bloomberg consensus estimates (BBGe). EBITDA margins at c19.0% were above PLe (18.0%) and in-line with BBGe (19.0%). Raw material costs were higher than expected, but BJAUT managed to report strong control on employee costs and opex which grew much lower than sales. Higher other income aided PAT beat.

Key takeaways: (1) Exports to see gradual recovery: BJAUT highlighted that in its top 15 markets which account 80% of their sales, motorcycles industry grew by 4% while Bajaj retail grew by 7%. Exports of premium bikes (Pulsar & Dominars) grew by c40% sequentially. Forex availability is also improving globally. Africa grew faster while ASEAN market were slow to recover due to macro conditions; LATAM held a steady pace. High inflation, lack of fuel subsidy have impacted Nigeria volumes and could take another a couple of quarters before reaching normal volumes. Bajaj’s Brazil plant in Manaus SEZ, which will be functional within 12 months. (2) 125cc+ segment to outperform industry: BAJUT guided 4-6% growth in the motorcycle industry over next few months, with >125cc segment outperforming. (3) 3W: CNG 3Ws are driving volumes thriving on CNG network expansion. Q1 saw new launches in EV 3W in both passenger and cargo version (4) Chetak ramp up: Network to reach 120 cities with 140 stores by end of Q2FY24, giving better service and superior experience. (5) Triumph 400: 17K bookings from 15 dealerships and by end of Q2 the touchpoints should increase to 44 towns with over 50 stores. Production to hit a rate of 5k per month by Sep-23 and exports should start from Oct-23. (6) Margin headwinds: BJAUT noted potential margin headwinds from negative mix impacts, which it plans to overcome from higher operating leverage in FY24.

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