Visit http://indiaer.blogspot.com/ for complete details Peak growth, rich valuations;
Downgrade to U/P
Growth to slow, Cut to Underperform
We downgrade rating to Underperform from Neutral, as we believe the earnings
upgrade cycle has ended. We expect sales and profit trajectory to decelerate
sharply over FY12-13E on renewed competitive pressure. Stock trades at
historical highs on traditional valuation parameters as well as premia to peers.
Our sum-of-the-parts based PO of Rs 1,495 implies 15x FY12E P/E.
Market share may be peaking
Bajaj Auto's two wheeler market share will likely plateau, and possibly decline
over our forecast period driven by (1) launches from competition in bikes (75% of
industry sales), namely Hero Honda (Splendor Pro, Super Splendor, premium
bike), Honda (110-125cc offerings) and M&M, and (2) its absence in relatively
faster growing scooter segment (17% of industry demand).
Margins vulnerable to sharper decline
Given the unlikely situation of easing in commodity prices or further shift in sales
mix to pricier, premium bikes and three wheelers (already 85% of sales), we
retain margin assumptions of 270bps decline to 19.1% by FY13E, as
(1) competitive pressures would lead to higher marketing and ad-spend, and
(2) weakening USD to INR will impact export contribution (35% of sales).
Stock is fully valued
Following 73% YTD stock rally, valuations now appear rich and the stock fully
valued, trading at a significant premium to historical and peer group average. Our
sum of parts methodology imputes P/E multiple similar to Hero Honda, as better
margin profile and return parameters make up for lower growth over FY11-13E.
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