The Board of Bajaj Auto (BJAUT) has accepted a brand new dividend coverage that hyperlinks dividend payout to the extent of money/money equivalents, in flip growing the payout to 90% of PAT (towards 50% payout within the outdated coverage). Considering a) robust working cashflows, b) restricted avenues to deploy money on the books, and c) declining yields on treasure, it is a step in the suitable course and will result in a re-rating.
Under the outdated dividend coverage, payout was deliberate at 50% of PAT. Under the revised coverage, dividend payout is linked to the extent of money on the books, as follows, money > 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 fifty% of PAT. It had internet money 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 end in a considerable enhance in DPS. Based on the brand new coverage, we count on DPS to extend from Rs 75/Rs 85/Rs 85 to Rs 142/Rs 175/Rs 190 for FY21/FY22/FY23.
The new dividend coverage would considerably cut back the tempo of accretion to surplus money. We consider it is a step in the suitable course as it will end in substantial enchancment in RoE viz 280bp/490bp (to twenty-eight.5%/29.5%) v/s the outdated dividend coverage.
On the core business aspect, we count on energy within the export markets to proceed, particularly for the reason that Africa business would see the advantage of increased crude oil costs (with a lag). In the India business, nevertheless, we count on weak point to persist not less than for the following 1–2 quarters in each 2W and 3W.
We decrease our EPS for FY22/FY23E by 2%/4%, factoring in decrease different revenue on account of upper dividend payout. BJAUT would profit from a) the premiumization pattern and b) good progress alternative in exports. While home 3W recovery could also be delayed, it’s weak to attainable disruption from electrification. Valuations at 18x/17x FY22/FY23E consol. EPS largely captures the robust progress momentum. Maintain ‘neutral’ with target price of Rs 3,875 (~18x Mar’23 consol EPS).