Buy Bajaj Auto; target of Rs 4,800: Sharekhan

Bajaj Auto Limited (BAL) reported strong operational performance during Q2FY22, led by higher average realization and EBITDA margin expansion. Net operating revenue was up 22.4% y-o-y to Rs 8,762 crore, led by 8.8% growth in volumes and 12.6% growth in average realization. EBITDA margin improved 80 bps q-o-q to 16% in Q2FY22, led by operating leverage benefits and cost reductions, partially mitigated by a rise in raw material costs. As a result, EBITDA and PAT improved 10.7% y-o-y and 12% y-o-y at Rs 1,401 crore and Rs1,275 crore respectively. We continue to remain positive on BAL’s performance going forward, led by its expected market share gains in domestic 125cc+ markets and continued dominancy in key export markets. The company is well placed in terms of capabilities to scale up its electric vehicle (EV) production when it witnesses faster adoption of EVs than expected. Also, there has been a recovery in three wheeler (3W) sales across its sub-segments, small/large passenger vehicles and cargo vehicles. We maintain buy on the stock given its strong business outlook and comfortable valuation.

Outlook

BAL’s business outlook remains positive with a recovery expected in FY2022, as economic activities normalise in the domestic market. The management expects exports to remain a key growth driver in FY2022. We expect BAL to continue to increase its market share in the domestic and export markets, given its strong portfolio of premium brands and cost-effective, entry-level electronic injection systems. OPM would expand because of a richer product mix, operating leverage and cost-control measures. The company has strong long-term revenue visibility, given its leadership position in the premium bikes segment and key export destinations. The stock trades below its historical average P/E multiple of 14.5x and EV/EBITDA multiple of 9.4x its FY2023E estimates. Hence, we retain our Buy rating on the stock with an unchanged price target of Rs. 4,800.

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