Bajaj Auto (BJAUT) Q2FY22 PAT was above our estimates on account of higher than expected EBITDA margins and higher average per unit realizations. "We expect domestic 2W market to remain soft in Q3FY22 and likely to post recovery during Q4FY22 while export market continues to show improvement for BJAUT," opined IDBI Capital Equity Research.

The Company is anticipated to face margin pressure during Q3FY22, due to high raw material prices. "To factor in weakness in domestic 2W market and raw material cost inflation, we revise our Sales and PAT estimates by -1.9%/-12% and -1.2%/-11.2% for FY22E and FY23E respectively. The Company is expected to report EPS of Rs 201 and Rs 224 for FY23 and FY24 respectively. At CMP, BJAUT stock is quoting at PER of 16.1xFY24E earnings. We retain our Hold rating on the stock with a revised price target of Rs 4,124 (PE of 18xFY24E + KTM value of Rs 95), the broking firm said.

Key highlights and investment rationale

PAT below estimates: During Q2FY22, BJAUT’s sales grew by 22.4% YoY to Rs 87.6 billion (our Estimates Rs 85.7 billion), driven by 8.6% volume growth and a 12.7% increase in average realizations. EBITDA margins during the quarter contracted by 155bps YoY to 16% (Our estimates 15%) on account of gross margin compression of 300bps. PAT increased by 12% YoY to Rs 12.7 billion against our estimates of Rs 11.8 billion.

Business Outlook and Earning Revision: We expect domestic 2W market to remain soft while recovery is expected from Q4FY22 onwards. International market continues to show improvement for BJAUT. To factor in weakness in domestic 2W market and raw material cost inflation, we revise our Sales and PAT estimates by -1.9%/-12% and -1.2%/-11.2% for FY22E and FY23E respectively.

Retain Hold: At CMP 3,701, BJAUT stock is quoting at PER of 16.1xFY24E earnings (Net of KTM). We understand, business environment for BJAUT to improve across its markets in coming quarters. We retain our HOLD rating on the stock with a revised price target of Rs 4,124 (PE of 18xFY24E + KTM value of Rs 95).

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