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Bajaj Auto rated ‘hold’; volumes take precedence over margins

Volume/EPS CAGR of 16/12% over FY18-20e; return of rational pricing to industry is awaited; ‘Hold’ rating maintained

Bajaj Auto Rating 'Hold': Volumes take precedence over margins
Bajaj Auto Rating 'Hold': Volumes take precedence over margins

The key takeaways from our recent meeting with Bajaj Auto (BJAUT) management are: (i) A 20% share of the domestic motorcycle market is a priority, and we believe that makes business sense (ii) Exports outlook remains strong driven by availability of USD in key markets and high oil prices (tailwind). BJAUT is not averse to passing on currency benefits to end-customers. (iii) Domestic three wheelers (3W): BJAUT is betting on market share gains in the diesel segment. It is not banking on removal of permits across states as a key driver of demand. Maintain Hold.

Domestic two-wheelers (2Ws): All eyes on 20% market share

Higher market share would also help BJAUT put more vehicles on road (brand building) and ensure dealer profitability. Besides, benefits of a sharp correction in CT are seen as improving brand visibility of its sibling Platina. Demand: While BJAUT has been able to maintain momentum, the recent steep jump in insurance cost has temporarily dented demand. Management expects elevated customer acquisition cost during the festive season. Only time (January) will reveal actual demand trend once the dust settles. FY20 demand is likely to get a boost prior to the implementation of BSVI norms.

Exports: Tailwinds exist

Management aims to sell about 2 m units in FY19. 3Ws are expected to maintain current run rate of 30–35k a month. The increase in crude price has particularly strengthened some of Bajaj’s key markets such as Nigeria, Egypt, Peru and Colombia. For 3Ws, Afghanistan and Iraq are under consideration. Volume growth over the next five years is likely to be 10–12%. Management is not averse to passing on the currency benefits to end-customers. That said, higher sales to the African region would put pressure on margins.

Outlook and valuations: Fairly valued; maintain ‘HOLD’

There is a perceptible change in management’s approach towards volumes over margins. We estimate BJAUT’s volume/EPS CAGR will be 16/12% over FY18–20. We maintain ‘HOLD/SU’ with a TP of `2,893, and value the stock at 16x FY20e core EPS + cash per share of `738 + KTM at `80. While valuations are reasonable, we prefer to wait for signs of rational pricing returning to the industry. At current price, the stock is trading at 14.5x FY20e EPS.

Key takeaways

Domestic 3W segment: Big states where permits are still needed to operate 3Ws – Delhi, Andhra Pradesh, Telangana and Karnataka. Big states where permits are not needed – Maharashtra, Gujarat, UP and West Bengal. In Maharashtra, most of the demand comes from Mumbai. Total 3W sales in Maharashtra were about 37k a quarter (out of which Bajaj captured 31k or 83% of total). Bajaj is averaging 33k units per month, which is a sustainable run rate in our view. There is no major stock left with the company. Profitability in 3Ws has reduced over the period as the company has also started selling four-stroke vehicles and diesel variants.

Domestic 2W segment update: Domestic demand has been stable despite increasing cost pressure. Festival season demand in India will be strong and beneficial for consumers, but at the expense of freebies from manufacturers. Introduction of the CT, which is a no-frills bike, as Bajaj’s cheapest offering has improved the sales of Platina. Pulsar continues to sell strong. Bajaj is facing strong competition from TVS in Africa. 2W business has increased in Nigeria. Profitability margins in Nigeria are in a single digit and so blended profitability has come down slightly.

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First published on: 15-10-2018 at 01:07 IST
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