Bajaj Auto Ends At Nine-Month High On Bullish Morgan Stanley Commentary

Morgan Stanley thinks Bajaj Auto Ltd. is the best placed among Indian two-wheeler makers to navigate the post-Covid-19 economic landscape, based on long-term trends around premiumisation, exports and power train changes.

It has cited improving volumes as a key re-rating trigger for the stock in 2021.

Morgan Stanley has maintained its ‘Overweight’ rating on the stock and has raised its price target to Rs 3,900 apiece from Rs 3,644.

“We think growth in 2021 will be driven by an urban demand rebound in India, and Bajaj, with its premium product mix and three-wheelers is well placed to benefit from the same,” Morgan Stanley analysts Binay Singh and Sushrut Ghalshasi wrote in a note. “Bajaj with its KTM brand Triumph launch in 2022 should see a 7% annual selling price CAGR over FY20-23 and domestic two-wheeler margins will expand.”

African markets accounted for 53% share of the company’s exports in FY20. With a presence in 79 countries, Bajaj is now No.1 or No.2 in 22 of them, according to the note.

The company is planning to expand capacity on the electric two-wheeler front and is also working with KTM to begin production of e-bikes in India by 2022. Morgan Stanley expects 10% of the company’s FY25 domestic sales to be electric.

Morgan Stanley has assigned a 50% weight to its base case price target of Rs 3,900 and 25% weight each to its bull and bear case targets of Rs 5,800 and Rs 2,180 respectively.

“Given that the earnings are in a recovery cycle, the premium to median is justified in our view,” the note said.

Bull Case Scenario

• Price target of Rs 5,800.
• Assume above normal business recovery.
• 34% volume growth in FY22 and 25% in FY23.
• Ebitda margins reach 20% in FY23 from 16% in FY21.

Bear Case Scenario

• Price Target of Rs 2,180.
• Volume decline in FY21 is much sharper.
• Overall sales drop by 18% in FY21 and rebound 15% in FY22.
• Ebitda margin drops to 16.5% in FY22 from 17% in FY20.

Morgan Stanley has cited stronger than expected demand recovery on potential tax cuts, competition letting market share slip and increase in dividend payout ratio as the key risks to upside.

Loss of market share, three-wheelers moving to electric vehicles faster than expected and halt in export recovery are cited as key risks to the downside.

Shares of Bajaj Auto ended 2.55% higher at Rs 3,129.2. This is the highest closing level for the stock since February this year. Out of the 51 analysts that track Bajaj Auto, 30 have a ‘Buy’ recommendation, 16 say ‘Hold’ while five suggest ‘Sell’. The 12-month return potential on the stock, according to Bloomberg, is 6.9%.