The rise in raw material cost may hit margins – Bajaj Auto

Update on the Indian Equity Market:

On Monday, Nifty closed in the red at 14,736 (-0.05%). Among the sectoral indices, Realty (+2.70%), FMCG (+1.70%), and IT (+1.85%) closed higher. PVT Bank (-1.70%), Bank (-1.63%), and Financial Services (-1.15%) closed in the red. Adani Ports (+5.17%), Britannia (+2.63%), and TCS (+2.58%) were the top gainers. Indusind Bank (-4.19%), Power Grid (-3.17%), and ICICI Bank (-2.20%) were among the top losers.

Excerpts from an interview of Mr Soumen Ray, CFO, Bajaj Auto with CNBC-TV18 dated 19^th March 2021:

• Speaking on the new dividend distribution policy, Mr Soumen Ray says, The Company will give up to 90% pay-out provided that the company has surplus funds in tune of Rs 150 bn or more.
• He says, It also depends on Capex plans. The company is having surplus cash of Rs 180 bn.
• The average annual Capex is around Rs2.5- 3bn and the company is using its assets effectively. The company is planning to put 1 factory in Chakan and cost is near $100mn.
• The earlier policy was a 50% dividend pay-out.
• On EV space, he says, The Company has strong EV plans but Capex required for EVs doesn’t need a large amount of money. It is important to sell the vehicle initially with lower profit and later scale-up that segment.
• The EBITDA space of Bajaj Auto gives adequate ammunition to sell EV’s initially at not a great profit and later scale it up.
• Speaking about raw material costs, he says, between Q4FY21E and 1QFY22E the industry will see a significant rise in raw material prices. This will lead to a hit on margins.
• To avoid a dip in consumer sentiment the company will gradually increase its product prices.
• Speaking on the Export market, he says, the demand continues to be healthy and INR has not depreciated as compared to other countries. The price of oil going up is positive for some African, and Latin American markets.
• The container issue has improved from what it was in December 2020.
• The company is giving discounts to some segments.

Asset Multiplier comments:

• We believe the increase in dividend payout ratio will result in an effective capital allocation thereby improving the return of equity ratio (ROE).
• We believe the gradual rise in product prices to offset higher raw material cost, high fuel prices, and rising cases of covid-19 might impact the near-term demand of 2 wheelers in the domestic market.

Consensus Estimate: (Source: Market screener website and Investing.com)

• The closing price of Bajaj Auto was ₹ 3,667 as of 22-March-2021.  It traded at 23x/19x/17x the consensus Earnings per share estimate of ₹ 158/193/221 for FY21E/FY22E/FY23E respectively.
• The consensus average target price is ₹ 3,976/- which implies a PE multiple of 18x on FY23E EPS of 221/-.