IIFL recommendation: Bajaj Auto – BUY: Still in high gear

Bajaj Auto – BUY: Still in high gear
Our recent meeting with Bajaj Auto reinforces our positive view on the company. Two-wheeler volume
growth remains strong, driven by a surge in rural consumption, and we expect industry growth rates
to continue at mid-teen levels. Bajaj, with both its key brands gaining increased traction, is wellplaced
to increase its market share, especially as its main rival, Hero Honda, may go through a change
of guard and rebranding. We retain BUY with a TP of Rs1,710 (16x 1-year-forward earnings).
Price hike to help Bajaj Auto maintain margins: Bajaj Auto took a 1–2% price hike from 1 October. This
will help the company keep its EBITDA margin at over 20% in the face of increasing component costs. While
steel and aluminium are again rising, component vendors too are enjoying better pricing power, making it
necessary for manufacturers to increase prices to maintain margins. Bajaj Auto has also hedged 100% and
70% of its target exports for FY11 and FY12, respectively, at Rs47 to the US dollar.
On course to exceeding its FY11 target of 4m vehicles, aiming for 20% growth in FY12: The
company is likely to exceed its guidance of 4m vehicles, with exports doing better than anticipated (likely to
end the year at 1.3m vehicles). Three-wheeler volumes too are running above the guided rate, and are likely
to end at 0.45m vehicles for FY11. The company is targeting 20% growth in FY12, assuming 15% growth in
industry volumes. The company is working on a new entry-level motorcycle to be launched in FY12.
Bajaj could be a near-term beneficiary of a change of guard at Hero Honda: Media reports indicate
that Honda is likely to exit Hero Honda and focus on its fully-owned subsidiary, HMSI. In the medium term,
this would increase competition in the two-wheeler space, as HMSI is likely to emerge as a stronger player
in the sector. However, we reckon Bajaj Auto could be a beneficiary in the short term, as Honda would need
some time to ramp up its distribution network (currently restricted largely to urban areas). The Hero Group
would take time to scale up its R&D efforts and badly needs a new product to prevent market-share losses.