Results below estimates on weak sales: Bajaj Auto reported weak Q1 result due to lower volumes sold in the quarter and higher RM cost. Revenue and EBITDA were 1.5% and 13% below the consensus estimates respectively. Though PAT beat the street estimates by 2%, this was due to 71% jump in the other income (dividend by KTM). Net sales and PAT declined by 5% (yoy) and 6% (yoy) respectively to `5,442cr and `524cr. EBITDA declined by 20% (yoy) to `938cr due to sharp increase in RM costs. EBITDA margin was at 17.2% vs. 18.5% in 4QFY17 and 20.5% in 1QFY17. PAT declined by 5.5% (yoy), slower than decline in operating profit due to steep increase in other income. Adjusted for `32cr exceptional expenses (GST led dealer compensation), Q1 PAT is at `956cr. Blended realization was at `59,976 showing a yoy growth of 5.7% and qoq decline of 1.7%. RM cost per vehicle accelerated by 10% yoy (faster than realization) reflecting higher RM prices. In the nutshell, the GST led destocking by the dealers in June and higher RM costs led to the weak results during this quarter.
The company has guided of pick up in volumes in the remainder of the year. It has indicated of a monthly run rate of ~21,000 in domestic 3Ws in 2Q/3Q of FY18 while in exports, it expects to clock ~1.8mn export sales volumes despite volatility in the markets. Company is likely to announce a deal with a premium segment motorcycle manufacturer in next two weeks which needs to be watched carefully. There will be no new launches in FY18E and company expects ~19.5%-20% EBITDA margin in FY18E vs. >20% margins FY16 and FY17 each.
Outlook and valuation: We expect Bajaj Auto to report 13.3%/12.5% CAGR in sales/PAT over the next two years and maintain ROE over ~22%. We value Bajaj Auto at 18.0x of FY19E EPS to `2,845/share and add KTM stake value of `139/share. We derive a target price of `3,151 with an accumulate rating.

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