Sunday, May 21, 2017

Key highlights from Bajaj Auto management concall

Volume outlook
·         No growth guidance for full year FY18. Apr sales stood at 150k units, May sales should be around 130k units and they should end 1Q at ~400-450k units.
·         Nigeria is yet to recover and even Sri Lanka hasn’t recovered. They are expecting a volume decline from these markets. Egypt is fine currently but the main issue hasn’t been resolevd hence it may come up as a headwind 2-3 months down the line
·         Hence, they expect exports to remain volatile and uncertain and hence they would review their guidance on a quarterly basis

Domestic 2Ws:
·         He indicated that HMC and HMSI are in the midst of restocking inventory at dealerships and hence BAL may lose market share in 1Q at a wholesale level.
·         However, retail demand is 6-7% yoy and they are not sure if this would be maintained for the full year. Management refrained from giving any volume growth outlook for FY18

Domestic 3Ws:
·         They have decent permit visibility of 40k units from Delhi and Maharashtra but they are not certain on the timing.
·         The cargo segment continues to be under pressure even now due to sustained impact from demonetisation.
·         They refrained from giving any growth guidance for this segment as well.

Margin guidance
·         Bajaj Auto has not yet taken any price increase in 1Q. they had taken the BS IV related price increase in 4Q itself.
·         The customer acquisition cost is likely to go up due to rising competitive pressure in FY18 and freebies like free insurance, interest subvention is likely to go up substantially in FY18
·         He indicated that there will be substantial margin pressure for the entire industry including Bajaj Auto in 1Q due to rising input cost pressure and competitive pressure
·         They are guiding for margin impact of ~100bps for the entire industry including Bajaj Auto in FY18

Other key highlights
·         He indicated that they had re-launched their Pulsar range followed by new launches of V-12 and Dominar in Jan2017. They do not have any new model launch in 1HFY18
·         There will be marginal margin impact for BAL due to its Pantnagar plant moving out of fiscal incentives from FY18 onwards. However, average tax rate is expected to increase 200bps yoy to 30% from FY18 onwards
·         While INR has appreciated sharply, based on their current hedges, they would be able to realise exports at ~INR 67 levels (same as FY17) with some impact on forex exposure that remains unhedged.

4Q results related
·         Discounts related to SC impact in last two days amounted to Rs16crs. They also had a one-off impact of Rs73crs of CSR spend in 4Q (first 9 months CSR spend was Rs21crs).
·         Both these are included in other expenses. Hence, adjusted for these one-offs, margins for 4QFY17 stood at 21.1%
·         Spare part sales for FY17 grew by 7% yoy to Rs27bn. Spare part sales can grow at a CAGR of 12-15% for the next few years.

Our view: Given the uncertain volume outlook for both domestic and export markets and due to rising cost pressures, earnings are likely to remain muted in the coming years. The recent run-up in the stock was clearly unwarranted. We remain Neutral on Bajaj Auto.

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