Bajaj Auto Share price: This is Morgan Stanley’s top pick; says best placed in 2-wheeler space

Bajaj Auto Share Price: Looking at long-term trends around premiumization, exports and power train changes, Morgan Stanley highlights that Bajaj Auto is best placed among two-wheelers. Morgan Stanley reiterates their overweight rating on Bajaj Auto share with a target of Rs 3900.

In 2020 two-wheeler demand was driven by rural segments, but Morgan Stanley thinks 2021 growth will be driven by an urban demand rebound in India and Bajaj Auto with its premium product mix and three-wheelers (3Ws) is well placed to benefit from the same. Although power train disruption is a key risk for OEMs, Bajaj Auto with its geographically diversified revenue mix and investments in compressed natural gas (CNG) and electric vehicles (EVs) is well placed to navigate through that transition. Valuations at a steep relative discount to Nifty make us bullish.

The three pillars of overweight rating for Bajaj Auto are as follows:

1) Urban demand rebound in 2021; premium bikes and three-wheelers to recover: Bajaj Auto with its three-wheeler business and premium bikes is more of an urban brand and thus lagged the industry as urban consumption was capped by Covid-related lockdowns. Incrementally Morgan Stanley expects an urban demand rebound and Bajaj Auto with its KTM brand Triumph launch (2022) should see a 7% FY20-23 ASP CAGR and domestic two-wheeler margins will expand. Morgan Stanley sees improving volumes as a key re-rating trigger for the stock in 2021.
 
2) High exposure towards fast-growing export markets implies higher terminal growth rate for Bajaj Auto: Bajaj Auto has a well-diversified export mix and a strategically high exposure towards under-penetrated two-wheeler markets such as Africa (which accounted for a 53% share of Bajaj’s exports in F20). Rising brand visibility in export markets helped Bajaj Auto gain share and it is now No. 1 or No. 2 in 22 countries and it has a presence in 79 countries.
 
3) CNG network expansion to offset EV disruption risks: Passenger 3Ws formed 15% and 6% of FY20 and FY21 EBITDA. An EV 3W total cost of running is lower than for CNG, but given the aggressive pace of CNG network expansion Morgan Stanley expects CNG and EV 3Ws to co-exist. Taking a conservative view, Morgan Stanley expects FY24 3W sales to be closer to FY19 levels. On the E2W side, Bajaj Auto is planning to expand capacity and is also working with KTM to start production of e-bikes in India in 2022. Morgan Stanley expects 10% of FY25 domestic sales to be electric.

FY23 EBITDA estimate is 10% ahead of consensus:

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Bajaj Auto currently trades at a F23 PE of 14x as against a peer average of 22x. Its PE relative to NIFTY trades below -1STD of its long-term average. High-margin business recovery will drive an ROE improvement (Morgan Stanley expects 26% in F23 versus 20% in FY20), which will drive a multiple rerating as we saw in the FY18/19 cycle when the stock was trading at 19x multiples. Morgan Stanley price target of Rs 3900 for Bajaj Auto implies upside of 28%; in addition we expect a 3% FY22 dividend yield.