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Reliance Research downgrades Bajaj Auto to Sell

Posted On: 2022-06-28 21:40:11 (Time Zone: IST)

Bajaj Auto - Company Update - Downgrade to SELL on Subdued Exports ahead; Disappointment on Buyback Scheme

Mr. Mitul Shah, Head of Research at Reliance Securities.

Bajaj Auto (BJAUT) announced its buyback scheme for Rs25bn at a price not exceeding Rs4,600, which is a premium of 19% to today's closing of Rs3,961. Maximum buyback size of Rs25bn is below street expectation, while its open market purchase for buyback is a disappointment for investors, as effective buyback price would be much below stated upper band of Rs4,600. We assume buyback at ~Rs4,000/share for Rs25bn, which translates into share count reduction of 2.16% (6.25mn shares), resulting into EPS accretion by similar quantum. However, our recent channel check in Africa indicates massive slowdown in the region due to sharp decline in consumer spending amid high inflation, sharp increase in vehicle prices and currency devaluation.

Nigeria being the largest market for Indian two- wheeler exporters, any adverse development in the country impacts overall exports business of these companies significantly. Moreover, BJAUT has been losing market shares consistently in these markets across 2Ws and 3Ws over past few years, while its biggest competitor TVS has been gaining the shares in the region. Though BJAUT may witness healthy volume for Jun'22 due to backlog of last month, we expect sharp YoY decline 2QFY23 onwards. We expect huge pressure on exports over near to medium term. Therefore, we cut our exports volume estimates by 16% and 14% for FY23E and FY24E respectively. Moreover, slower than expected recovery in domestic 2Ws and factoring market share loss, we reduce our domestic volume estimates by 4% and 0.5% for FY23E and FY24E respectively, resulting into 11% and 8% downward revision to our overall volume estimates. Factoring lower volume and margin pressure we reduce our revenue and EBITDA estimates by 10%/8% and 13%/9% for FY23E/FY24E respectively. However, with lower number of share count post buyback, our FY24E EPS is reduced by 7% to Rs222. Lowering our valuation to 16x (from earlier 17x) on FY24E EPS and adding Rs200/share for the stake in subsidiary, PMAG (holding company of KTM), we revise our TP to Rs3,750 from earlier Rs4,250. In view of significant cut in high margin exports business, slower recovery in domestic business, market share loss domestically and in overseas markets coupled with premium valuation post recent run up making risk reward adverse, we downgrade Bajaj Auto to SELL from BUY.

Outlook & Valuation

We expect BJAUT's domestic volume to witness a growth of 9% in FY23E, while exports would decline by 7%. We estimate 2% CAGR in exports over FY22-FY24E amid challenging business environment as well as company's market share loss. We believe that street would follow and cut the export volume for FY23 soon. We lower our volume/revenue/EBITDA estimates by 11%/10%/13% and 8%/8%/9% for FY23E and FY24E respectively. Factoring its buyback offer and lower share count, we cut our EPS estimates by 9%/7% for FY23E/FY24E. In view of significant cut in high margin exports business, slower recovery in domestic business, market share loss domestically and in overseas coupled with premium valuation post recent run up making risk reward adverse, we downgrade Bajaj Auto to SELL from BUY. We expect street to follow valuation downgrade with subdued exports going ahead. Lowering our valuation at 16x from earlier 17x on FY24E EPS and adding Rs200/share for the stake in subsidiary, PMAG (holding company of KTM), we revise our TP to Rs3,750 from earlier Rs4,250.

Shares of Bajaj Auto Limited was last trading in BSE at Rs. 3887.30 as compared to the previous close of Rs. 3862.05. The total number of shares traded during the day was 25910 in over 3293 trades.

The stock hit an intraday high of Rs. 3906.25 and intraday low of 3784.30. The net turnover during the day was Rs. 100037929.00.

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