Bajaj Auto - Domestic volumes weak, margins impress - LKP Research

Weakness in domestic markets leads us to cut volume targets

With domestic volume growing by just 7% YTD due to demand softness and competition, Bajaj Auto reported a qoq decline of 4% in topline at Rs50.6bn, while on a yoy basis, this was 21% up. Domestic total volumes declined by 6% qoq to 6.94 lakh units, as the two wheeler market started facing a slowdown from November end. December numbers of the company were significantly below our expectations. Higher cost of ownership clubbed with high interest rates and rising fuel prices has been troubling the company. Due to this, we have cut our domestic volume estimates for FY 12E/FY 13E to 2.83mn/3.01mn respectively.

New launches in domestic markets and RE60 in export markets to help volume growth in FY 13

Exports sales for the quarter were down 10% qoq considering competition in markets like Africa from Honda and overall global demand softness. Exports contributed 35% of sales this quarter and with expected launch of the recently launched commercial 4wheeler RE60 in the Sri Lankan markets in May 2012 will help the company to increase the contribution of exports to total volumes. With new launches of the high margin KTM bikes, Pulsar variant and Discover variant in the ensuing quarters, we may witness Bajaj Auto weathering the weakness in demand observed off late. We expect exports to grow at 24%/18% in FY12E/13E to 1.49mn/1.77mn respectively and the total volumes to grow at 13%/11%.

Robust margins assisted by weaker rupee, price hikes and easing RM prices

Bajaj Auto reported a solid 21% EBITDA margin during the quarter which was an increase of 90 bps qoq and 70 bps yoy. This was mainly due to weak rupee and impact of easing commodity prices (RM to sales was at 70.4% v/s 71.4% qoq). Also the company had taken price hike of Rs500 per vehicle in October which helped them to obtain auto industry's highest margins globally. PAT adjusted for derivative loss of Rs 589 mn came in at Rs8340mn, which was way above our expectations helped by better than expected operating performance despite volumes being weak. Tax rate was at 27% as against 28.5% qoq.

Outlook and valuation

Given the weak domestic performance by Bajaj Auto we are cutting our volume estimates for the company while maintaining our margin estimates. In order to quantify our caution on the stoxck, we are assigning a lower multiple to Bajaj Auto at 13.5x from our previous multiple of 15x. We have cut our earnings estimates by 4% each for the FY12E and FY 13E. With the price correcting by ~23% in a quarter, the stock looks attractive from current levels. At CMP of Rs 1467, the stock trades at 12.2x times FY13E EPS of Rs 120. With robust margin profile and opportunities in the export markets, we prefer this stock over its peers. However, from CMP of Rs 1558, we believe there is a limited upside for the stock. Hence, we downgrade our Bajaj Auto to Neutral from BUY while reducing our target price to Rs 1645 (includes Rs 21 from KTM business value).

Source : Equity Bulls

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