The Board of Bajaj Auto (BJAUT) has authorized a new dividend policy that hyperlinks dividend payout to the level of money/money equivalents, in turn rising the payout to 90% of PAT (against 50% payout in the old policy). Considering a) sturdy operating cashflows, b) restricted avenues to deploy money on the books, and c) declining yields on treasure, this is a step in the appropriate path 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 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 50% of PAT. It had net 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 outcome in a substantial improve in DPS. Based on the new policy, we count on DPS to improve from Rs 75/Rs 85/Rs 85 to Rs 142/Rs 175/Rs 190 for FY21/FY22/FY23.
The new dividend policy would substantially lessen the pace of accretion to surplus money. We think this is a step in the appropriate path as it would outcome in substantial improvement in RoE viz 280bp/490bp (to 28.5%/29.5%) v/s the old dividend policy.
On the core organization side, we count on strength in the export markets to continue, specifically given that the Africa organization would see the advantage of greater crude oil costs (with a lag). In the India organization, nonetheless, we count on weakness to persist at least for the next 1–2 quarters in each 2W and 3W.
We reduce our EPS for FY22/FY23E by 2%/4%, factoring in reduce other revenue on account of greater dividend payout. BJAUT would advantage from a) the premiumization trend and b) very good development chance in exports. While domestic 3W recovery may well be delayed, it is vulnerable to probable disruption from electrification. Valuations at 18x/17x FY22/FY23E consol. EPS largely captures the sturdy development momentum. Maintain ‘neutral’ with target cost of Rs 3,875 (~18x Mar’23 consol EPS).