Buy Bajaj Auto – 3QFY2011 Result Update - Angel Broking

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Bajaj Auto – 3QFY2011 Result Update

Angel Broking recommends Buy on Bajaj Auto with a Target Price of Rs 1,495.

Bajaj Auto (BAL) reported its 3QFY2011 results, with revenue in line and earnings

above our estimates. Performance was driven by strong sales of premium

motorcycles, improved operating leverage and higher other income. We remain

positive on BAL and revise our earnings estimates marginally upwards to factor in

higher other income due to increased yields on liquid investments. Owing to the

recent decline in the stock price, we recommend Buy (Neutral) on the stock.

In-line operating performance driven by favourable product mix: BAL reported a

strong 26.7% yoy increase in net sales to `4,177cr (`3,296cr), which was in line

with our expectations of `4,113cr. Revenue growth was driven by 17% yoy growth

in volumes with high-margin motorcycles, Pulsar and Discover, contributing ~70%

to total motorcycle sales. Favourable product mix along with price hikes helped

the company to post ~8.7% yoy growth in average net realisation. Two-wheeler

sales during the quarter increased by 17.6% yoy, while three-wheeler sales grew

by 12.7% yoy. EBITDA margins came in 40bp ahead of our estimate at 20.3%,

posting a decline of 162bp yoy and 33bp qoq. However, better product mix and

reduced staff and other expenditure limited the contraction in operating margins

to a certain extent. As a result, net profit surged by 40.4% yoy to `667cr, better

than our estimates of `596cr, mainly due to higher-than-expected other income.

Outlook and valuation: At `1,297, the stock is trading at 14.7x FY2011E and 13x

FY2012E earnings. We remain positive on BAL in the two-wheeler segment owing

to its diversified business model and strong revenue and earnings visibility.

Currently, the stock is available at reasonable valuations due to the recent decline

in its price. Hence, we recommend Buy (Neutral) on the stock with a Target Price

of `1,495, valuing it at 15x FY2012E earnings.

Net sales up 26.7%, driven by 17% volume and 8.7% realisation growth: BAL

reported strong 26.7% yoy growth in net sales to `4,177cr (`3,296cr), driven by a

17% yoy increase in total volumes and an 8.7% yoy increase in average net

realisation. Domestic revenue grew by 32% yoy, while exports revenue grew by

19% yoy during the quarter. On a sequential basis, net sales declined by 3.7% due

to 5.4% dip in volumes.

Premium motorcycle brands Discover and Pulsar continued to witness strong

traction in volumes and contributed ~70% to BAL’s total motorcycle sales during

the quarter. The company’s domestic motorcycle sales grew by 22.6%

(underperforming the industry growth of 28.7%) in 3QFY2011, while domestic

three-wheeler sales increased by 10.9% yoy (against 17.8% industry growth).

Overall, motorcycle sales grew by 17.6%, whereas three-wheeler sales posted

12.7% yoy growth during 3QFY2011. Pulsar recorded its highest quarterly sales of

~262,000 units, while Discover sold ~327,000 units during the quarter. On the

exports front, volumes grew by 8.3% yoy, led by robust demand from overseas

markets. The company’s growth in the three-wheeler segment during the quarter

was negatively affected, as it is facing capacity constraints in its four-stroke range

of three-wheelers.

As a result of the underperformance in the domestic motorcycle category, the

company’s market share declined by ~297bp to 25.6% in 3QFY2011 from 28.5%

in 2QFY2011. Overall, motorcycle market share, including exports, declined by

315bp to 31% in 3QFY2011 from 34.1% in 2QFY2011.

EBITDA margins down 162bp yoy to 20.3%, marginally ahead of estimates:

During 3QFY2011, EBITDA margins came in 40bp ahead of our estimate at

20.3%, down 162bp yoy and 33bp qoq. The margin contraction was primarily on

account of a 240bp yoy increase in raw-material cost, which accounted for 70.1%

of net sales during the quarter. However, the decrease in employee costs and other

expenditure (down 110bp) coupled with price hikes undertaken to pass on input

costs helped arrest further margin erosion. Moreover, improved operating leverage

and better product mix along with higher commercial vehicle volumes helped the

company to restrict yoy and qoq contraction in margins to a certain extent. As a

result, overall operating profit for the quarter increased by 17.4% yoy to `849cr

(`723cr). Management has guided to sustain EBITDA margins at 20% levels in

FY2011 and FY2012.

Net profit up 40.4% yoy on higher other income: BAL reported net profit growth of

40.4% yoy to `667.1cr (`475.1cr), which was higher than our expectation of

`596cr, largely due to higher other income of `99.5cr (`35.1cr). Other income

comprised income earned on surplus cash and cash equivalents of ~`3,821cr.

Further, improved operating performance and lower depreciation expense (down

13.1%) aided the bottom-line growth on a yoy basis.

Conference call: Key highlights

􀂄 Production: Management has marginally lowered its volume guidance for

FY2011 to ~3.9mn units from ~4mn units earlier. During 3QFY2011, the

company produced ~75,000 units/month from the Pantnagar facility.

Management is targeting sales of ~15,000 units per month in the domestic

three-wheeler market. On the exports front, three-wheeler volumes are driven

by robust demand from Sri Lanka, Egypt, Africa and Nigeria. Currently, the

company is facing capacity constraints in its four-stroke range of

three-wheelers. Management expects the situation to return to normal by

March 2011.

􀂄 EBITDA margins: Management has guided for margins to be sustainable at

the current levels of ~20%. As per management, the company enjoys superior

margins in the domestic two-wheeler segment compared to its peers. On the

exports front, EBITDA margins are currently at ~20%. In the three-wheeler and

spare parts business, BAL enjoys EBITDA margins in excess of ~30%.

The recent price hikes in the range of `500-`1,000 in the domestic as well as

exports market will help the company to mitigate the impact of increased

raw-material cost.

􀂄 Exports: On the exports front, BAL continues to witness strong demand from

Africa, Nigeria, Sri Lanka, Bangladesh and Colombia. The company sees

Africa as a major growth driver for exports.

􀂄 BAL plans to introduce new Discover motorcycle in April 2011 and a variant of

Pulsar by end of CY2011. The much-awaited KTM model is scheduled for

launch in 1QFY2012E.

􀂄 BAL’s cash and cash equivalent as on December 31, 2010, stood at

`3,821cr. The company is expecting ~`650cr from the government in the

form of VAT refunds pertaining to operations during 9MFY2011.

Management has guided ~`85cr in the form of other income during

4QFY2011E.

􀂄 BAL plans to add ~130 new dealers across India in an attempt to bolster sales

of its products. Of this, 40–45% is expected to come in the vicinity of the

existing dealers.

􀂄 The company’s total investment in its Indonesian subsidiary and in KTM as on

December 31, 2010 stands at `138cr and `871cr, respectively.

Investment arguments

􀂄 Focus on Discover and Pulsar to improve market share: BAL continues to

witness strong demand in the two-wheeler segment from its strong dual

offering of Discover and Pulsar. The successful launch of Discover 100cc bike

in the executive value segment has helped BAL in notching a 25.6% market

share in the domestic motorcycle market in 3QFY2011. BAL is positioning

itself in line with its strategy of ‘value and price products', wherein it proposes

to tap higher-value bike segments, which have a high-growth potential and

fetch better realisations. BAL has also launched new products in the

high-margin 125cc+ segment.

􀂄 Three-wheeler registering healthy growth: BAL has a strong presence in the

three-wheeler market, with an overall market share (including exports) of

around 55.7% in December 2010. The company tops the passenger

auto-rickshaw segment (62.9% market share), which accounts for ~88% of the

three-wheeler market. The three-wheeler segment fetches higher margins than

the company’s two-wheeler business. Although the company has lost some

market share in the three-wheeler domestic market, improving export volumes

have more than compensated to post higher volume growth. We expect the

company’s three-wheeler volumes to grow by 12–13% over FY2010–12E.

􀂄 High growth potential in export volumes: BAL registered strong exports CAGR

of 37% during FY2005–10, aided by a 43% CAGR in two-wheeler exports and

a 22% CAGR in three-wheeler exports. Going ahead, we estimate BAL to

register a 24.6% CAGR over FY2010–12E, driven by the strong demand

outlook from the exports market. BAL has also hedged around 90% of its

FY2011 exports at a USD–INR rate of `46.7. Hence, any sharp appreciation

of the INR in FY2011 will not have a significant impact on the company’s

margins.

Outlook and valuation

We remain positive on BAL and maintain our volume and revenue estimates;

however, we revise our earnings estimates marginally upwards to factor in higher

other income due to increased yields on liquid investments.

At `1,297, the stock is trading at 14.7x FY2011E and 13x FY2012E earnings.

We remain positive on BAL in the two-wheeler segment owing to its diversified

business model and strong revenue and earnings visibility. Currently, the stock is

available at reasonable valuations due to the recent decline in its price. Hence, we

recommend Buy (Neutral) on the stock with a Target Price of `1,495, valuing it at

15x FY2012E earnings.