BAJAJ AUTO Growth trajectory maintained:: Edelweiss

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􀂃 PAT marginally ahead of estimates
Bajaj Auto’s (BAL) Q2FY11 PAT of INR 6.8 bn was 4% ahead of our estimate of
INR 6.6 bn. The variance was on account of higher–than-expected revenue,
which benefited from a 4% sequential increase in realizations per vehicle.
􀂃 Net revenue jumps 50% Y-o-Y
The company’s net revenue, at INR 43.4 bn (up 50% Y-o-Y) was driven by the
volume growth with total units sold crossing the 1-mn mark (motorcycle sales
increasing 47% Y-o-Y; three wheeler sales registering 37% Y-o-Y growth) during
the quarter. Further, the healthy revenue growth was aided by improvement in
average realisation per vehicle (up ~3% Y-o-Y and Q-o-Q) largely on account of
better product mix (higher proportion of three wheelers and lower proportion of
the low end Platina in volumes) along with a marginal price hike.
􀂃 EBITDA margins, at 20.7%, up 70bps Q-o-Q
BAL’s EBITDA margins, at 20.7%, jumped 70bps sequentially on the back of
marginal decline in commodity prices, better operating leverage, and a better
product mix. This was broadly in line with our estimate of 20.5%. Other non
operating income rose 3% Q-o-Q and 285% Y-o-Y led by increasing liquid
investments (up INR 5.7 bn over FY10). Overall net profit at INR 6.8 bn
(Edelweiss estimate at INR 6.5 bn) increased 70% Y-o-Y and 16% Q-o-Q.
􀂃 FY11 volume guidance maintained at 4 mn units
Management has reiterated its guidance for FY11 at 4 mn units (3.6 mn two
wheelers, 0.4 mn three wheelers). Capacity constraints could ease post the
festival season. For FY12, capacity will be increased to 5.0 mn units (from 4.3
mn). The company expects pressure on EBITDA margins in H2FY11 on account
of higher commodity prices, stronger conversion costs from auto ancillaries, and
increased promotion expenses in Q4FY11. For FY11, BAL has maintained EBITDA
margin of 20% (versus 20.3% in H1FY11).
􀂃 Outlook and valuations: Positive; maintain ‘HOLD’
At CMP of INR 1,514, the stock is trading at 18.0x FY11E and 15.5x FY12E
revised earnings of INR 85 and INR 98, respectively. Hence, while the outlook
remains positive, we maintain ‘HOLD’ recommendation on the stock with a
target price of INR 1,570 i.e., 16x FY12E. On a relative return basis we rate the
stock ‘Sector Performer’.