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Bajaj Auto (BJAUT)
Automobiles
Upgrade to ADD after sharp underperformance. Bajaj Auto has corrected by 14%
since Jan 1, 2011 and underperformed the Sensex by 7%, which we believe reflects
excessive pessimism on slowing growth of the two-wheeler industry and decline in
EBITDA margins in FY2012E. We upgrade the stock to ADD rating as we revise our
earnings estimates upwards by 3% for FY2011-12E on positive surprise on 3QFY11
results. We marginally increase our target price to Rs1,500 from Rs1,462 earlier.
3QFY11 results surprise positively, margins hold despite raw material pressures
Bajaj Auto’s 3QFY11 profit after tax of Rs6,671 mn (32% yoy, 2% qoq decline) was 9% above our
estimates. While revenues were in line with our estimates, key variance was due to positive
surprise on the EBITDA margins (90 bps above our estimates). Revenues grew by 27% yoy driven
by 17% yoy improvement in volumes and 9% yoy increase in average selling prices. EBITDA
margins at 20.3% declined by 1.6% yoy due to sharp escalation in raw material costs partly offset
by operating leverage benefits and improvement in product mix. EBITDA margins were better than
our expectations due to lower staff and other expenses. Higher other income and lower tax rate
(due to higher R&D expenditure) also contributed to the higher-than-expected profits.
Upgrade to ADD and increase target price to Rs1,500
We upgrade the stock to ADD (from REDUCE) after sharp recent underperformance of the stock.
We increase our target price to Rs1,500 (from Rs1,462 earlier) based on a 3% increase in earnings
over FY2011-12E (driven by 30 bps increase in EBITDA margins). Our target price is based on 15X
PE multiple on FY2012 EPS. We continue to prefer Mahindra and Maruti over two-wheeler stocks
due to better volume growth potential over the next two years. However, we like Bajaj Auto over
Hero Honda in the two-wheeler segment due to superior margin profile and lower valuations. We
believe Bajaj Auto stock performance will be driven by management guidance on exports volume
growth in FY2012E and ability to manage raw material cost pressures.
Management is hosting a conference call tomorrow at 4:30 PM India time to discuss
3QFY11 results.
3QFY11 results surprise due to better-than-expected margins
Bajaj Auto’s 3QFY11 profit after tax of Rs6,671 mn (32% yoy, 2% qoq decline) was 9%
above our estimates. While revenues were in line with our estimates, key variance was due
to positive surprise on the EBITDA margins (90 bps above our estimates). Revenues grew by
27% yoy driven by 17% yoy improvement in volumes and 9% yoy increase in average
selling prices. EBITDA margins at 20.3% declined by 1.6% yoy due to sharp escalation in
raw material costs partly offset by operating leverage benefits and improvement in product
mix. EBITDA margins were better than our expectations due to lower staff and other
expenses. Higher other income and lower tax rate (due to higher R&D expenditure) also
contributed to the higher-than-expected profits.
Management indicated that: (1) Staff costs were lower qoq due to one-time impact of
Rs90 million related to VRS settlement in 2QFY11. (2) Other expenses were also lower qoq
due to one-time impact of Rs150 mn loss related to selling of one aircraft in 2QFY11. (3)
Pantnagar production was lower qoq (211,000 vs 275,000 in 2QFY11) due to correction of
inventory at plants. (4) Staff costs and other expenses are likely to remain at current levels
for 4QFY11E. (5) Tax rate was lower at 27.3% due to higher R&D expenditure during the
quarter but management guided to 28% tax rate for FY2011E (6) The company has taken a
price increase of Rs500-1,000/vehicle on Platina, Discover and Pulsar models with effect
from January 1 both in domestic and export markets, which should cushion impact of rising
raw material costs.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Auto (BJAUT)
Automobiles
Upgrade to ADD after sharp underperformance. Bajaj Auto has corrected by 14%
since Jan 1, 2011 and underperformed the Sensex by 7%, which we believe reflects
excessive pessimism on slowing growth of the two-wheeler industry and decline in
EBITDA margins in FY2012E. We upgrade the stock to ADD rating as we revise our
earnings estimates upwards by 3% for FY2011-12E on positive surprise on 3QFY11
results. We marginally increase our target price to Rs1,500 from Rs1,462 earlier.
3QFY11 results surprise positively, margins hold despite raw material pressures
Bajaj Auto’s 3QFY11 profit after tax of Rs6,671 mn (32% yoy, 2% qoq decline) was 9% above our
estimates. While revenues were in line with our estimates, key variance was due to positive
surprise on the EBITDA margins (90 bps above our estimates). Revenues grew by 27% yoy driven
by 17% yoy improvement in volumes and 9% yoy increase in average selling prices. EBITDA
margins at 20.3% declined by 1.6% yoy due to sharp escalation in raw material costs partly offset
by operating leverage benefits and improvement in product mix. EBITDA margins were better than
our expectations due to lower staff and other expenses. Higher other income and lower tax rate
(due to higher R&D expenditure) also contributed to the higher-than-expected profits.
Upgrade to ADD and increase target price to Rs1,500
We upgrade the stock to ADD (from REDUCE) after sharp recent underperformance of the stock.
We increase our target price to Rs1,500 (from Rs1,462 earlier) based on a 3% increase in earnings
over FY2011-12E (driven by 30 bps increase in EBITDA margins). Our target price is based on 15X
PE multiple on FY2012 EPS. We continue to prefer Mahindra and Maruti over two-wheeler stocks
due to better volume growth potential over the next two years. However, we like Bajaj Auto over
Hero Honda in the two-wheeler segment due to superior margin profile and lower valuations. We
believe Bajaj Auto stock performance will be driven by management guidance on exports volume
growth in FY2012E and ability to manage raw material cost pressures.
Management is hosting a conference call tomorrow at 4:30 PM India time to discuss
3QFY11 results.
3QFY11 results surprise due to better-than-expected margins
Bajaj Auto’s 3QFY11 profit after tax of Rs6,671 mn (32% yoy, 2% qoq decline) was 9%
above our estimates. While revenues were in line with our estimates, key variance was due
to positive surprise on the EBITDA margins (90 bps above our estimates). Revenues grew by
27% yoy driven by 17% yoy improvement in volumes and 9% yoy increase in average
selling prices. EBITDA margins at 20.3% declined by 1.6% yoy due to sharp escalation in
raw material costs partly offset by operating leverage benefits and improvement in product
mix. EBITDA margins were better than our expectations due to lower staff and other
expenses. Higher other income and lower tax rate (due to higher R&D expenditure) also
contributed to the higher-than-expected profits.
Management indicated that: (1) Staff costs were lower qoq due to one-time impact of
Rs90 million related to VRS settlement in 2QFY11. (2) Other expenses were also lower qoq
due to one-time impact of Rs150 mn loss related to selling of one aircraft in 2QFY11. (3)
Pantnagar production was lower qoq (211,000 vs 275,000 in 2QFY11) due to correction of
inventory at plants. (4) Staff costs and other expenses are likely to remain at current levels
for 4QFY11E. (5) Tax rate was lower at 27.3% due to higher R&D expenditure during the
quarter but management guided to 28% tax rate for FY2011E (6) The company has taken a
price increase of Rs500-1,000/vehicle on Platina, Discover and Pulsar models with effect
from January 1 both in domestic and export markets, which should cushion impact of rising
raw material costs.
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