Bajaj Auto - Accumulate 2QFY2011 Result Update:: Angel Broking

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Bajaj Auto - Accumulate 2QFY2011 Result Update
For 2QFY2011, Bajaj Auto (BAL) posted strong results with
better-than-expected top-line and bottom-line performance.
Growth was led by robust volume growth in the domestic and
export markets, improved operating leverage and higher other
income. We maintain our positive outlook on BAL and revise
our estimates marginally upwards to account for 1) higher other
operating income (higher export incentives) and 2) higher other
income on increased liquid investments.
Net sales up 50.4%; riding on 45.7% volume growth: BAL
reported 50.4% yoy jump in top line to `4,342cr (`2,888cr),
driven by robust 45.7% yoy increase in total volumes and 2.7%
yoy increase in average net realisation. Domestic revenue grew
by 52% yoy, while exports revenue grew by 44% yoy.
Discover and Pulsar continued to witness strong traction in
volumes and now contribute over 86% to BAL's domestic
motorcycle sales. The company's domestic motorcycle sales grew
53% (outperforming the industry growth of 21%) in 2QFY2011,
while domestic three-wheeler sales were up 28% yoy. Overall,
motorcycle sales grew 47.3%, whereas three-wheeler sales were
up 37.3% yoy during 2QFY2011.
In terms of volume market share, BAL’s overall, motorcycle
market share, including exports, improved to 33.8% in
1HFY2011 from 26.9% in 1HFY2010. However, BAL's domestic
three-wheeler passenger carrier market share declined to 47.1%
in 1HFY2011 from 48.3% in 1HFY2010.
EBITDA margins down 138bp yoy to 20.7%; marginally ahead
of estimates: During 2QFY2011, EBITDA margins declined by
138bp yoy to 20.7%, slightly ahead of our estimates of 20%.
The margin contraction was primarily on account of a 490bp
yoy increase in raw-material cost, which accounted for 69.6%
of net sales during the quarter. However, the decrease in
employee costs (~110bp decline) and other expenditure (208bp

decline) helped arrest further margin erosion. As a result, overall
operating profit for the quarter increased by 41% yoy to `897cr
(`637cr).
Net profit surges 69.3% yoy on higher other income: BAL
recorded net profit growth of 69.3% yoy to `682cr (`403cr),
which was higher than our expectation by 6%, primarily due to
higher other income of `83.7cr (`21.7cr). Other income
comprised income earned on surplus cash and cash equivalents
of ~`3,700cr.
Outlook and valuation
At `1,513, the stock is trading at 15.1x FY2012E earnings, in
line with industry leader Hero Honda. We continue to prefer
BAL over Hero Honda in the two-wheeler segment. Hero
Honda's domestic market share in the motorcycle segment
dropped to 53.4% in September 2010 from 61.2% in September
2009. With new launches from HMSI, TVS and Yamaha
available for sale, Hero Honda's market share could decline
further. Until this happens, we see BAL outperforming Hero
Honda on the volume and profit fronts in FY2011. We
recommend Accumulate on BAL with a Target Price of `1,603.