Q1FY24 Review: Bajaj Auto: Steady quarter, Export recovery awaited

26 Jul 2023 , 01:53 PM

Bajaj reported a strong quarter (Ebitda +51% YoY, +14% QoQ), despite continued weakness in export volumes. Results were largely in line with IIFL Capital Services estimates. Demand environment for domestic 2W and 3W is relatively stable. Export volumes (2W+3W) have fallen substantially from peak, and are set for a rebound with expected improvement in end-demand and low dealer inventory. Analysts of IIFL Capital Services upgrade their FY24/FY25 EPS estimates by about 4%, driven by slight increase in ASP, margin and other income. Bajaj Auto is a play on recovery in 2W industry (still substantially off FY19 peak) and normalisation of 2W/3W exports (quarterly run-rate 40% below peak). Ramp-up of Triumph volumes, if strong, can add 2-3% to revenue estimates. Retain BUY with TP of Rs5,800 (20% upside). 

Q1 Ebitda up 51% YoY, in line with estimate: 

Q1 revenue grew 29% YoY (in-line), led by 10% increase in volumes, significant improvement (+17%) in blended ASP. Ebitda margin expanded 275bp YoY to 19.0%, but came off sequentially by 30bps. Ebitda margin came in line with analysts of IIFL Capital Services estimate. This was despite lower-than-expected gross margin (adverse mix), which was offset by lower operating costs. Absolute Ebitda and PAT came in line with our estimate. 

Domestic 2Ws clocking steady recovery; exports have bottomed out: 

Unlike other Auto segments, 2W industry volumes were 24% below FY19 peak in FY23. Analysts of IIFL Capital Services expect the industry to clock ~10% volume growth in FY24 and continue growing at 8-9% in FY25/FY26. They expect Bajaj to clock higher-than-industry growth in domestic 2W in FY24 (supply issues in FY23). Exports are still weak (-33% YoY in Q1). However, retails are clocking better than wholesales and dealer inventory levels have come off substantially in recent quarters. Improvement in end-demand (expected in coming months) would be accompanied with re-stocking by dealers, leading the faster recovery in wholesales. 

17% EPS Cagr + 5% dividend yield + fair valuations: 

Analysts of IIFL Capital Services forecast 17% EPS Cagr for Bajaj over FY23-26, built on 11% volume growth and margin expansion. The 17% EPS Cagr, when combined with 4-5% dividend yield, implies 20%+ annual total return.