Retain Buy on Bajaj Auto - Emkay

EBIDTA margins stood at 20.8% (refer our result - first cut attached) instead of 20.5% due to change in accounting policy for variable wages (Rs 120mn)

Wholesale billings will be subdued for a month or two due to inventory reduction from 25-26 days to 21 days. Retail sales continue to be robust with 15% growth.

Factoring in lower export incentives (5% of exports vs 10% earlier). Our revised FY12 EPS stand at Rs 97.5 (-8.7%YoY). Introduce FY13 est. with vol of 5mn and EPS of Rs 113.6.

Retain BUY with a target of Rs 1700 (15x FY13 est). Key risks arise from lower volumes as focus on margins to prevail over volumes.

Conference call highlights

Currently, export incentives amounting to ~10% of export revenues include DEPB benefits of ~9% and FMS incentive of ~2% for exports to all countries except Sri Lanka, Bangladesh and Philippines. These are received in tradable certificates which are sold in open market. Focus on margins will be imperative in case of DEPB benefit is withdrawn. Company willing to sacrifice some volume in order to maintain it margins.

Higher staff costs were outcome of one time transition in variable pay policy from end of financial year to apportioning over each quarter. Hence, an additional impact of Rs 120mn was felt during Q4 FY11.

Company repaid deferred sales tax credit as it obtained a good discounting rate. Company made a payment of Rs 11.97bn and recorded a gain of Rs 8.27bn. Currently there is ~ Rs 1.7bn of deferred sales tax credit on books represented by ~ Rs 800mn for the current year and balance is already securitized and hence cannot be prepaid.

Addition of 130 dealers from April onwards represent new dealers in existing location (75%) and upgraded from partial to full service dealerships. Expect incremental impact on volumes to be felt over the whole year.

Boxer 150cc to be launched in 2QFY12. Expect demand for the product as there exists a market for the same.

Company has taken a price hike of ~2-3% in domestic market in April and similar quantum in exports markets during May. However, as RM contracts have been negotiated at much higher rates, management expects margins to remain subdued during next two quarters.

Management expects margins to improve in H2FY11 driven by moderation in metal prices. Hence, EBITDA margins for FY12e should be marginally lower than ~20% levels seen in FY11.

Valuations and View

We have factored in export incentive at 5% as compared to earlier est of 10% and lowered our volume est. by ~3% resulting in earnings drop of 9%. Based on our revised estimates, the stock trades at attractive valuations of 13.2x/11.4x PER and 8.7x/7.2x EV/EBIDTA on our FY12/FY13 est. Given the high cash flow generation and >3% dividend yield (annualized), we find stock attractive. We retain our BUY on the stock with a target price of Rs 1700 based on 15x FY13 EPS est. of Rs 113.6.

Source : Equity Bulls

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