Buy Bajaj Auto Q3FY11; Superlative performance, Attractive valuations :: Emkay

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Bajaj Auto Ltd.

Superlative performance, Attractive valuations

BUY

CMP: Rs 1,297                                       Target Price: Rs 1,650

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n     Results above est. driven by higher sales at Rs 41.8bn (est- 39.2bn) and lower tax rate at 27.3% (est-28.6%). Margins were 20.3% (est-19.8%). PAT was Rs 6.7bn (est-Rs 5.6bn)

n     Addition of ~130 new dealers in rural and tier II/III cites and launch of new Discover in April 2011 to provide volume momentum. Expect 3-wheelers demand to remains strong

n     Lower our FY12 volume by 3% to 4.5mn units (18% growth) and EPS est  by 3.1% to Rs 106.8. Valuations attractive at 12.1x PER and 8.4x EV/EBIDTA our FY12 est.

n     Upgrade to BUY from ACCUM post the price correction. Stock offers FCF yield/div. yield of 7% (FY12E)/3%(FY11E). Key risks - sharp jump in metal price/demand slowdown

Net Sales – Above expectation

Net sales at Rs 41.8bn was above est. of Rs 39.2bn due to higher avg. realization per

vehicle. Avg. selling price (ASP) per vehicle stood at Rs 42,543 (up 8.7% YoY and 1.8%

QoQ) against est. of Rs 39,908. BAL had raised prices by ~2% in domestic markets in

October 2010.

EBIDTA above est. driven by strong topline

Higher than expected topline resulted in EBITDA of Rs 8.5bn, ahead of est. of Rs 7.8bn.

Margins at 20.3 were above est. of 19.8% due to topline. All the cost items were above

our est. in absolute terms

APAT – all round performance

Net profits at Rs 6.7bn was above our est. of Rs 7.6bn, due to strong operating performance,

higher other income (Rs 995 mn vs est. of Rs 837 mn). Effective tax rate at 27.3% was lower

than est of 28.6%, indicating higher profit contribution from the tax free plant.

Valuations and View

At Rs 1,297, the stock trades at PER of 14.3x and 12.1x and EV/EBIDTA of 10x and 8.4x our

FY11 and FY12 estimates respectively. We have upgraded our FY11 EPS by 3.7% to Rs

90.4 per share but lowered our FY12 EPS estimate by 3.1% to Rs 106.8 per share due to

lower volume assumptions (as indicated below). We have lowered our TP by 3.1 % to Rs

1,655 valuing the stock at PER of 15.5x of FY12 estimates. Post the stock price correction,

we find the stock attractive given FCF yield/dividend yield of 7% (FY12E)/3% (FY11E). We

upgrade the stock to BUY from ACCUMULATE. The key risk to call comes from sharp jump

in metal price or slowdown in demand in the industry.