Bajaj Corp reported in-line Q4FY17 revenue and Ebitda, while PAT came below estimates (down 2.9% y-o-y) impacted by lower than expected other income. Volumes continued to be subdued due to the lingering after-effect of DeMon — overall volume dip of 6.9% y-o-y was largely owing to the 7.1% dip in ADHO category and 2.5% drop in Nomarks’. At gross margin level, the company continued to benefit from older inventory bought at benign prices. But, the 167 bps and 455 bps y-o-y rise in staff cost and other expenditure offset this benefit. Implementation of GST, improvement in rural, success of new Nomarks’ strategy and monsoon remain key monitorables. Maintain Hold.
Volumes languish; gross margin pressure to crop up: Bajaj Corp registered 6.9% y-o-y dip in volumes, led by 7.1%/13.2% and 2.5% y-o-y fall in ADHO/BAHO and Nomarks’ volumes. The decline was largely on account of destocking in wholesale channel and strain in rural geographies, which are expected to continue till H1FY18. The company continued to benefit from older inventory which was bought at benign prices as gross margin jumped 287 bps y-o-y.
However, with this inventory expected to last only till April 2017, sustenance of gross margin may be in peril. Outlook and valuations: Recovery drags; maintain Hold: Volume growth is expected to improve starting H2FY18 led by lower base, good monsoon and redressal of GST implementation pangs. However, we would keep a close eye on the proposed strategy for Nomarks. We estimate 7-10% EPS CAGR over FY17-19 coupled with ~500 bps RoAE improvement. The stock is currently trading at P/E of 23.4x FY19E. We maintain HOLD/SU with target price of Rs 429.