Maintain ‘neutral’ on Bajaj Auto, target price Rs 3,875

By: |
March 20, 2021 7:53 AM

On the core business side, we expect strength in the export markets to continue, especially since the Africa business would see the benefit of higher crude oil prices (with a lag).

The new dividend policy would substantially reduce the pace of accretion to surplus cash.

The Board of Bajaj Auto (BJAUT) has approved a new dividend policy that links dividend payout to the level of cash/cash equivalents, in turn increasing the payout to 90% of PAT (against 50% payout in the old policy). Considering a) strong operating cashflows, b) limited avenues to deploy cash on the books, and c) declining yields on treasure, this is a step in the right direction and could lead to a re-rating.

Under the old dividend policy, payout was planned at 50% of PAT. Under the revised policy, dividend payout is linked to the level of cash on the books, as follows, cash > Rs 150b – dividend payout of 90% of PAT. Cash at Rs 75–150b – dividend payout of 70% of PAT ? Cash < Rs 75b – dividend payout of 50% of PAT. It had net cash of Rs 168.3b as of December 2020, implying dividend payout of 90% of PAT.

This, coupled with the withdrawal of the dividend distribution tax, would result in a substantial increase in DPS. Based on the new policy, we expect DPS to increase from Rs 75/Rs 85/Rs 85 to Rs 142/Rs 175/Rs 190 for FY21/FY22/FY23.

The new dividend policy would substantially reduce the pace of accretion to surplus cash. We believe this is a step in the right direction as it would result in substantial improvement in RoE viz 280bp/490bp (to 28.5%/29.5%) v/s the old dividend policy.

On the core business side, we expect strength in the export markets to continue, especially since the Africa business would see the benefit of higher crude oil prices (with a lag). In the India business, however, we expect weakness to persist at least for the next 1–2 quarters in both 2W and 3W.

We lower our EPS for FY22/FY23E by 2%/4%, factoring in lower other income on account of higher dividend payout. BJAUT would benefit from a) the premiumization trend and b) good growth opportunity in exports. While domestic 3W recovery may be delayed, it is vulnerable to possible disruption from electrification. Valuations at 18x/17x FY22/FY23E consol. EPS largely captures the strong growth momentum. Maintain ‘neutral’ with target price of Rs 3,875 (~18x Mar’23 consol EPS).

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