Bajaj Auto: 2QFY11 PAT at Rs.6.8B (+57% yoy) surprises :: JPMorgan

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Bajaj Auto
Neutral
BAJA.BO, BJAUT IN
2QFY11 PAT at Rs.6.8B (+57% yoy) surprises on
higher other income; operating results inline





• Results above estimates on higher other income: Bajaj Auto reported 2Q
PAT at Rs.6.8B (+57% yoy) - which was 7% above estimates - the variance was
driven by higher other income. While revenues came in at Rs.43.4B (+50%
yoy), operating performance was broadly inline as EBITDA margins came in at
20.7% (-140bp yoy, +70bp qoq). Other income at Rs.837m surprised as the
company has a current surplus of c. Rs.40B.
• Management Guidance: Management in its conference call reiterated its
volume guidance of 4MM units (+40% yoy) over FY11E - domestic volume
growth is to be driven by Discover and Pulsar brands, and exports are likely to
cross 1.1MM units. Margins though are likely to come in at c.20% levels over
FY11E (in line with the current quarter) – though the company has raised
prices, the appreciating INR as well as inflationary pressures will likely restrict
margin expansion. Bajaj has hedged c.70% of its exports for FY12 at Rs.46.5 to
the USD. The company expects to have a capacity of 5m units by FY11E as it
expands capacity in Pantnagar.
• Outlook: We raise our EPS estimates for FY11-12 by c.12% to factor in strong
volume growth in the quarter. We set a revised Mar-11 PT of Rs.1,540, which is
based on a P/E multiple of 15x one-year forward EPS – which is at the upper
end of the trading band. We believe that this multiple is justified, given that
Bajaj Auto has steadily gained market share in the domestic market, besides
exports now account for c.30% of total sales. While Bajaj Auto is benefiting
from healthy industry growth and product momentum, we expect the growth
rates will moderate over 2H given a demanding base effect. Besides, margins are
likely to be range bound (at current levels) as highlighted above. We re-iterate
our neutral stance. Bajaj is our preferred stock in the two-wheeler space though,
given its healthy product momentum and likely market share gains over the near
term.
• A key downside risk to our price target is a greater-than-expected build-up in
competitive pressures (which would likely be dependent on the outcome of the
relationship between Honda and the local Hero group), while a key upside risk is
a higher-than-anticipated industry growth rate.