Bajaj Auto share price: Jefferies retains Buy rating with a Rs 4300 price target

Bajaj Auto's Q3 volume grew 9% YoY while net profit rose 23% YoY. EBITDA margin was up 1.7ppt QoQ, on operating leverage, taking EBITDA/vehicle to a decade-high. On the call, Bajaj Auto was optimistic on exports given demand recovery and market share gains, but slightly cautious on the sustainability of domestic demand improvement. Higher metal prices will pull down margins in coming quarters but this is already factored into our estimates. Maintain Buy. Jefferies find Bajaj Auto’s valuations at 16x FY23E PE reasonable and retain our Buy with a Rs 4300 price target based on 18x FY23 PE.

Bajaj Auto's Q3 volumes grew 9% YoY, led by the strong 26% YoY growth in export 2Ws. Q3 EBITDA was up 27% YoY and came in 14% above Jefferies estimate. Q3 gross margin was flat QoQ as the impact of higher commodity prices has yet to flow through. EBITDA margin expanded 170 bps QoQ to 19.4%, thanks to operating leverage benefit on higher volumes (+24% QoQ). EBITDA/vehicle rose 10% QoQ to a decade-high. Q3 net profit came in at Rs 15.6 bn, up 23% YoY and 16% above our estimate. Consolidated net profit was 10% higher than standalone led by strong KTM performance.

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On the conference call, Bajaj was optimistic on the outlook for exports given the strong demand recovery and market share gains. Export demand has recovered to 90% of the pre-COVID level, with Africa growing, Latin America & South Asia at 80-100%, but ASEAN still at 50-70%. Bajaj Auto believes that it has also gained market share in many of its key markets. Tight container availability has resulted in dispatches lagging retail and inventory levels in export markets are below normal.

Bajaj Auto said that domestic 2W demand is broadly flattish YoY but was a bit cautious on the sustainability as it believes the pick-up could be partly led by pent-up demand. Bajaj's recently launched Pulsar-125cc bike is seeing a good response and has helped it gain share in the 110-125cc segment; however, it has lost 4ppt YoY share in 125cc + bikes, resulting in its overall motorcycle share remaining flattish YoY.

Bajaj Auto is planning 1-2 product upgrades or new launches each quarter in FY22. Domestic 3W demand remains weak and is still at 40% of the pre-COVID level, but has started to see a slow sequential recovery. Bajaj plans to launch an electric 3W in second half FY22.