Bajaj Auto: In-line 2Q results; stock remains expensive:: Macquarie Research,

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Bajaj Auto: In-line 2Q results; stock remains expensive


Event
􀂃 Bajaj Auto reported 2Q FY3/11 results which were in line with our estimates at
both the top and bottom lines. We maintain Underperform, as we believe that
the stock has more than priced in the positives.
Impact
􀂃 In-line results: Bajaj Auto’s total operating income increased 50% YoY to
Rs43.4bn, as compared to our estimate of Rs43.2bn. Operating profit for the
quarter at ~Rs9bn (up 41% YoY) was ~2% below our estimate. However
higher other income and lower than estimated depreciation led to reported net
profit coming in largely in line at Rs6.8bn (up 69% YoY).
􀂃 Operating margin impacted by higher other expenditure: Operating
margins declined ~140bps YoY and stood at 20.7% for the quarter; around 60
bps lower than our estimate. A stronger-than-expected increase in other
expenditure due to higher transportation costs, interest subvention and loss
on the sale of assets, were the primary reason behind the decline.
􀂃 Raw material cost pressures to increase: After the decline in 2Q, prices of
key raw materials like steel and aluminium are back to the highs seen in 1Q of
this fiscal year, where management expects them to remain for the rest of the
year. Further, vendors are asking for higher conversion costs. As a result,
input cost pressures will negatively impact margins, despite the ~2% price
hike taken in the domestic market (~70% of sales) in October 2010.
􀂃 Other expenditure to rise with increased competition: Competition in the
domestic executive motorcycle space has increased significantly with the
launch of many new products and the entry of M&M (MM IN, Rs701, OP, TP:
Rs740) in the segment (See fig 5). As volume growth slows we believe that
higher promotion expenses or reduction in product prices will further impact
margins in the medium term.
Earnings and target price revision
􀂃 We increase our FY11, FY12 and FY13 estimates by 8-12% mainly on
account of higher export volume assumptions. Accordingly we increase our
target price to Rs1,190 from Rs1,060 earlier.
Price catalyst
􀂃 12-month price target: Rs1,190.00 based on a DCF methodology.
􀂃 Catalyst: Slowing industry growth and increasing competitive intensity
Action and recommendation
􀂃 Maintain Underperform: We estimate the company’s earnings to grow at a
CAGR of ~10% over the next three years as volume growth slows post the
festive season and margins decline on higher input costs and increasing
competition. At over 17x FY12E PER, the stock remains expensive.