Analysts Remain Bullish On Bajaj Auto, Unfazed By Q1 Profit Drop

Analysts maintained their bullish investment recommendation for Bajaj Auto Ltd. on account of its efforts to cut costs and hopes of a recovery in automobile demand, mainly two-wheelers, even as the coronavirus pandemic disrupted operations.

Net profit of the two-wheeler maker fell 53% year-on-year to Rs 528 crore in the quarter ended June. Its revenue declined 60% to Rs 3,079.2 crore.

While Bajaj Auto’s operating profit and margin dropped in the first quarter, they beat estimates. The earnings before interest, tax, depreciation and amortisation declined 66% year-on-year to Rs 409 crore—compared with the consensus estimate of Rs 322 crore. Operating margin contracted to 13.3% from 15.4%, but higher than the 10.6% forecast.

“There are strong indications that particularly from second half of June, the demand is quickly coming back to its normal levels,” said Rakesh Sharma, executive director at Bajaj Auto. “There are pockets that are underperforming like the metros and segments that are doing extremely well like the agri business based in small rural areas.”

The retail data at dealer levels, pending orders, and the money dealers are putting at inventory indicate that things are unfolding in a positive direction, according to Sharma. “We are definitely seeing motorcycle sales to be much more positive in August and September.”

Bajaj Auto’s domestic sales and exports declined 73% and 54% year-on-year, respectively, during the first quarter. But, according to a statement, June witnessed a decent recovery and the company’s performance was better than the industry.

That may have prompted some analysts to even raise their target price for the two-wheeler maker.

Of the 54 analysts tracking the stock, 27 suggest a ‘buy’, 19 recommend a ‘hold’ and eight have a ‘sell’ rating. The average of the Bloomberg consensus 12-month target price implies a downside of 2.1%. The stock fell as much as 1.13% on Thursday compared with a 0.14% gain in the benchmark Nifty 50 Index.

Here’s what brokerages have to say about Bajaj Auto’s first-quarter results:

CLSA

• Maintains ‘buy’ rating; hikes price target to Rs 3,550 from Rs 3,400 apiece
• Cost cuts drive earnings beat
• Management guides for continued demand restoration in coming months
• Results show two-wheelers are better prepared to control fixed costs
• Offers FY22 free cash flow yield of 5.9%
• Forecast free cash flow conversion at 54-70% of Ebitda in FY21-23

Credit Suisse

• Maintains ‘neutral’ rating, target price unchanged at Rs 3,030 apiece
• Better currency realisation and better-than-expected cost cuts aid margins
• Domestic two-wheeler demand ramping up well; exports largely keeping pace with domestic
• Gross margin expanded sequentially but may face headwinds ahead
• Outlook on exports and three-wheelers remains cloudy as well

Morgan Stanley

• Maintains ‘overweight’ rating; raises price target to Rs 3,388 from Rs 2,807 apiece
• Tight cost cuts, forex gains led to Ebitda beat
• FY21-23 earnings estimates are largely unchanged
• Expects multiples to re-rate because volumes are below prior peak
• Strong first quarter, launch of the Triumph brand in 2022 to also aid re-rating
• Aggressive and sustained price competition a key downside risk
• Stronger-than-expected demand recovery, sharp fall in commodity prices a key upside risk

IIFL Securities

• Maintains ‘buy’ rating with a price target of Rs 3,370 apiece
• Resilient business model helps in Covid-19-hit quarter
• Lowest operating and financial leverage on its P&L
• Strong margin performance despite weak volumes
• Forecast 18% volume decline in FY21 with revival in FY22 and FY23
• Demand scenario is improving
• Ebitda margin should rebound as volumes normalise
• Raises FY21-23 EPS estimates by 8%, 3% and 4%, respectively

Investec

• Maintains ‘buy’ rating; raises target price to Rs 3,160 from Rs 2,700 apiece
• First quarter Ebitda was about 30% ahead of street’s estimates, led by beat on margins
• Improvement in exports volumes, currency related risk seem to abate
• Slight pullback in domestic demand by mid-July, expect recovery around festive
• Raises target multiple to 18x from 15x, in line with five-year average, on the back of improved visibility on demand environment