Rupee depreciation to improve Ebitda margin slightly: Rupee has depreciated by 7% versus USD, 7.5% versus Nigerian Naira and 7.5% versus Egyptian pound since Q1FY19 average levels. Our economist has also revised his INR-USD exchange rate to 72 in FY2020 and FY2021 versus 69.5 earlier. Export revenues form 43% of Bajaj Auto’s revenues. Hence a 3.5% revision in INR-USD estimate could lead to 150 bps expansion in Bajaj Auto’s Ebitda margin if the company retains the entire benefit. The company has been passing on the currency benefits in export and domestic market to gain market share. We bake in 60-90 bps increase in our Ebitda margin estimate for FY2020-21 as we believe the company will pass on these currency benefits partly to consumers.

We have increased our volume estimates by 3-5% over FY2019-21 primarily reflecting Bajaj Auto’s aggressive pricing strategy in the domestic economy motorcycle segment and strong growth in three-wheeler exports. We have thus increased our earnings estimates by 5-8% over FY2019-21 period. We have also increased our target price to `2,700 (from `2,500 earlier) factoring in the increase in our earnings estimates and roll over to September, 2020 (versus March, 2020 earlier).

Our TP is based on 14X September 2020e core EPS + `200/share for KTM stake + `634/share value of cash and cash equivalents. We retain our Sell rating due to deterioration in profitability in the domestic motorcycle segment and absence of scooters in the company’s portfolio, which will likely cap re-rating of the stock.