Bajaj Auto - Raising estimates and target price; Buy :: Anand Rathi

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Bajaj Auto - Raising estimates and target price; Buy

n       Upswing continues. Bajaj Auto’s (BAL) good results show profit bettering the previous peak of 1QFY11. While BAL has seized the low-hanging fruit in terms of rapid increase in market share and operating leverage; positives from sustained volume growth, good operating performance, higher other income, and enhanced capacity at Pantnagar (thereby reducing short-term constraints) would continue to benefit it ahead. We re-iterate a Buy and raise our target price to Rs1,846 from Rs1,299.

n       Good 2Q results, though as expected. In 2QFY11, BAL’s yoy sales growth was 50.4%, EBITDA growth 41% and profit growth 56.8% to Rs6.8bn. EBITDA margin was 20.7%, a 70-bp qoq improvement, attributable to steady commodity costs and lower staff costs (since bonuses and incentives are paid in 1Q).

n       Raising estimates; introducing FY13e EPS. We raise our FY11e and FY12e earnings 17.7% and 17.4% respectively, to reflect good motorcycle demand (40% yoy growth in FY11), stable EBITDA margins in the range of 20% and higher other income (by ~3x yoy in FY11 on higher free cash flow generation). We also introduce FY13e EPS of Rs122.2 (14.2% yoy growth).

n       Valuation and risks. We raise our target price to Rs1,846 (based upon 17x FY12e core EPS of Rs96 and value of cash & investments at Rs213. We re-iterate a Buy. Risks would be keen competition leading to destructive price wars, export strategy not panning out as expected, and a steep rise in commodity prices.