bajaj auto,Higher revenues and in-line margins deliver marginal upside.:: Kotak Sec,

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Higher revenues and in-line margins deliver marginal upside. Bajaj Auto’s 2QFY11
PAT came in 6% above estimates, driven by sequential improvement in realizations,
higher financial income and lower depreciation. However, a seasonal increase in
working capital saw in a smaller proportion of earnings reach the bank. We tweak our
EPS estimates upwards but maintain our REDUCE rating as the stock is discounting the
continuation of the strong demand, pricing environment and a strong product cycle.


Bajaj Auto reported slightly better than expected PAT on higher realizations; margins were in line
Bajaj Auto reported PAT for 2QFY11 of Rs6.8 bn, up 69% yoy and 16% qoq. The reported PAT
came in 6% better than our expectations of Rs6.4 bn with the upside being driven by higher-thanexpected
revenues. Revenues for the quarter came in at Rs43.4 bn compared to our estimate of
Rs41.5 bn. Realizations for the quarter were up 4% qoq and came in better than expectations.
The sequential increase in realizations was driven by price increases taken during the quarter and a
richer mix consisting of a higher proportion of 3-wheelers and Pulsars.
Margins were in line with estimates; up 70bps qoq but down 130 bps yoy
EBITDA margins for the quarter came in at 20.7% compared to 20% reported in 1QFY11 and
22% in 2QFY10. The 70 bps of sequential margin improvement was driven by lower raw material
costs and higher realizations. Raw material costs as a percentage of sales declined to 73.5% from
74.1% as the company’s raw material contracts reflected the pullback we saw in commodity
prices during the May-June period. The sequential decline was offset by increases in tire prices and
certain components.
Tweaking up FY2011E and FY2012E EPS estimates by 3%, largely reflecting 2QFY11 beat
We are raising our FY2011E and FY2012E EPS estimate to Rs91 and Rs104 from Rs88 and Rs101
prior. The increase primarily reflects higher financial income and lower depreciation expense. We
expect depreciation expense to be flat or even trend down from 2QFY11 levels as the company’s
Chakan plant assets gets fully depreciated. Our FY2011E and FY2012E earnings estimates reflect
volume growth of 38% and 15%, respectively, and margins in the20% range.
Tweaking target upward to Rs1,450, maintain REDUCE
We raised our target by Rs30 to Rs1,450 to reflect the higher earnings estimates. We maintain our
REDUCE rating as the stock largely reflects the strong demand fundamentals, product cycle and
pricing power being enjoyed currently. Our earnings estimates assume a continuation of these
favorable factors into FY2012E and could prove aggressive in the event of a mean reversion in
growth to the 10-12% range, given increasing competitive intensity in the motorcycle segment.