Bajaj Auto rises 2.5% post results, here is why CLSA and Morgan Stanley upgraded stock
Bajaj Auto Management said initial festival days indicate flattish trends but acknowledged that the post festival outlook for domestic two-wheelers (2Ws) remains uncertain.
CLSA believes Cost controls drive earnings beat for Bajaj Auto. Management said demand for all categories except domestic 3Ws was 80-90% of normal. Management hopes to strengthen market share in the mid / premium segments. Jefferies found commentary cautious for domestic 2Ws and 3Ws, but more optimistic for exports. Ambit says with low chances of near-term domestic 3W demand revival.
CLSA maintains a BUY rating, raising target price to Rs 3575 from Rs 3,480 and increasing FY21-23 EPS estimates 2-4%. EBITDA margin continues to surprise; product mix is expected to improve in the second half. Bajaj Auto Q2 FY21 results exceeded forecasts, with revenue and EBITDA (down 7/1% YoY) 3%/7% above our estimates. EBITDA margin was 17.7% (up 110bps YoY, 60bps higher than CLSA estimate) despite a 100bps hit due to withdrawal of export incentives. Management said demand for all categories except domestic 3Ws was 80-90% of normal.
Guidance balances domestic uncertainty with export buoyancy
Management said initial festival days indicate flattish trends but acknowledged that the post festival outlook for domestic two-wheelers (2Ws) remains uncertain. Management hopes to strengthen market share in the mid / premium segments. Two-wheeler financing share improved to about 50% in Q2 vs 70% in FY20. Export trends have improved and Bajaj has gained share in 85% of its markets by volume. Domestic 3Ws are back to 25% of pre Covid levels but inventory has also been corrected to reflect the new normal of retail. Management said 3W ride hailing has improved, driven by shared mobility services such as Ola and Uber.
Morgan Stanley maintains an overweight rating with a price target of Rs 3644.
Risks to Upside
1) Stronger than expected demand recovery as the government cuts taxes on two wheelers.
2) Competition lets market share slip and does not join the price wars.
3) Increase in dividend payout ratio.
Risks to Downside
1) Domestic three-wheelers move to EVs much faster than MS expects.
2) Bajaj again starts losing market share in domestic motorcycles.
3) Export recovery is halted
Jefferies retained its Hold rating with a price target of Rs 3025. Key Takeaway from Bajaj Auto’s Q2 results was EBITDA down just 1% YoY (4% beat) as higher margins offset the impact of lower volumes. Net profit fell 19% YoY (in-line with estimates) due to lower financial income and a higher tax rate. Jefferies found commentary cautious for domestic 2Ws and 3Ws, but more optimistic for exports. Jefferies believe margins are also unlikely to improve much from the Q2 level given input cost pressures and some normalization of fixed costs.
Margins unlikely to improve much further
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The sharp rise in steel and base metal prices is likely to pose a headwind in the second half of FY21.
Ambit maintains a sell rating on Bajaj Auto with a price target of Rs 3169 from Rs 3178 earlier. Ambit says with low chances of near-term domestic 3W demand revival, gross profit / unit sustenance seems tough at present levels, especially with stronger INR and rising RM prices. The relatively better 3W performance in exports vs domestic market is led by less stringent lockdowns and lower dependence on financing for 3Ws purchases in export markets.
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