UBS: Bajaj Auto -Pricing a sharp slowdown, maintain Buy

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UBS Investment Research
Bajaj Auto
Pricing a sharp slowdown, maintain Buy
�� Worries already in the price, maintain Buy (lower PT to Rs 1,550)
The stock has corrected sharply by 15% YTD, following weaker-than-expected
December shipments leading to a likely miss of the 4m volume guidance given by
management. We however, believe the concerns are already priced in. We believe
the industry demand and pricing environment remains positive. Bajaj Auto is likely
to continue benefiting from its strong growth in exports to other emerging markets.

�� Remain bullish on 2W growth; expanding distribution
We expect new launches and distribution expansion to drive FY12 volume growth.
Bajaj Auto has announced plans to add 130 dealerships from April 2011, adding to
the existing 500 currently. However, given Bajaj Auto’s higher exposure to
financing, which may be adversely affected by higher interest rates, we are
reducing our domestic 2W growth for Bajaj Auto to 15% YoY for FY12/13 from
20%YoY previously.

�� Reducing estimates on slower volume growth, reducing margin estimates
Our estimates assume a further 150bps erosion in the EBITDA margin in FY12 to
17.9% after a 250bps erosion in FY11 on account of high raw material costs and an
unfavourable mix with slower growth of 3Ws. We lower our FY11/12/13 EPS
estimates from Rs88.62/101.98/119.07 to Rs82.63/89.56/101.86.
�� Valuation: maintain Buy; new price target of Rs1,500 (from Rs1,775)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool, assuming a WACC of 11.3%.


Change in estimates
􀁑 Bajaj Auto has high exposure to financing which might get adversely
affected by higher interest rates. We therefore reduce our domestic 2W
growth estimates by 15% YoY for FY12-13E from 20% YoY previously.
􀁑 We lower our motorcycle export estimates to 20%/15% YoY for FY12/13E
from 30%/20% previously. We reduce our 3W export growth estimates for
FY12 from 15% YoY to 10% YoY.
􀁑 We lower our EBITDA margin assumption by 203/236/244bps for
FY11/12/13E to incorporate higher raw material costs and lower export
incentive


Valuation
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers with UBS’s VCAM tool, assuming a
WACC of 11.3%. Our 12-month target price implies Bajaj Auto will trade at
15.2x FY13 EPS estimate.