Bajaj Auto Performance Highlights by Angel Broking,

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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.
Owing to the recent drop in the stock price, we recommend Accumulate on BAL.

Strong operating performance; volume momentum continues: BAL reported a
strong 50.4% yoy increase in net sales to `4,342cr (`2,888cr), which was above
our expectations of `4,212cr. Revenue growth was largely driven by robust ~46%
yoy growth in volumes led by Pulsar and Discover, which now contribute ~86% to
domestic motorcycle sales. Two-wheeler sales increased by 46.9% yoy, while
three-wheeler sales were up 37.3% yoy during the quarter. On the operating
front, EBITDA margins declined by 138bp yoy to 20.7% due to a 490bp yoy
increase in raw-material cost. However, better product-mix, improved operating
leverage and reduced staff and other expenditure restricted the contraction in
operating margins to a certain extent. Consequently, net profit surged 69.3% yoy
to `682cr, ahead of our estimates of `644cr, mainly due to higher other income.

Outlook and valuation: At the CMP of `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.