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Bajaj Auto
Multiple wheels of growth
Event
We transfer coverage of Bajaj Auto to Amit Mishra with an Outperform rating
(previously Underperform). Our TP of Rs1,650 (vs. Rs1,190) implies 15%
upside. We are positive on domestic two-wheeler sales growth and BJAUT is
our top pick in the segment. BJAUT has multiple growth engines: 2-wheelers,
3-wheelers and a large export business. Bajaj’s dominant market share in 3-
wheelers and focus on premium 2-wheeler segments lend resilience to its
best-in-class margins.
Impact
Multiple drivers of growth. Bajaj has a well-diversified business model with
55% of sales coming from domestic 2-wheelers, 11% from domestic 3-
wheelers and 30% from exports in FY11. This diversification should support
revenue growth as well as margins for the company.
2-wheeler volume growth to remain strong. We expect Bajaj’s FY12 2-
wheeler sales to grow 18% YoY, ahead of the industry’s 16% YoY. As Honda
is likely to become more aggressive in the 2-wheeler market in India, we
expect BJAUT’s margins to be impacted, but to a much lesser extent than
Hero Honda. Growth in the 3-wheeler segment depends on legislation, which
remains unpredictable. We expect Bajaj’s 3-wheeler sales to grow 10% YoY
in FY12.
Exports to grow ahead of domestic business. ~30% of Bajaj’s sales come
from exports (2-wheeler + 3-wheeler). We expect exports to grow 25% YoY in
FY12, ahead of domestic business, driven by strong demand from Latam and
SE Asia. We do not expect Hero Honda to impact on Bajaj’s export business
materially, as it doesn’t have the products to challenge Bajaj’s key products
(Pulsar or 3-wheelers) that have worked in these high-growth export markets.
Focused strategy gives confidence on margin sustainability. We believe
Bajaj’s margins (the highest in the sector) are sustainable due to its larger
presence in the premium motorcycle segment, dominant market positioning in
the high-margin 3-wheelers and continued benefits from export sales.
Currently, Bajaj’s domestic motorcycle business has 250bp higher margin
than Hero Honda.
Earnings and target price revision
We expect BJAUT to see EPS CAGR of 15% between FY11-13E, led by a
17% CAGR in volumes. Our EPS estimates are 5-6% above consensus for
FY12-13E.
Price catalyst
12-month price target: Rs1,650.00 based on a DCF methodology.
Catalyst: Volume growth data and new product launches.
Action and recommendation
Bajaj Auto stock is trading at 13x FY12E PER, which is a 20% discount to
Hero Honda’s valuations. At our DCF-based target price, the stock would
trade at 15x FY12E PER, reflecting its strong earnings growth prospects, in
our view. We believe Bajaj should trade at a premium to Hero Honda, as it is
structurally favourably placed due to established in-house R&D and strong
umbrella brands.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Auto
Multiple wheels of growth
Event
We transfer coverage of Bajaj Auto to Amit Mishra with an Outperform rating
(previously Underperform). Our TP of Rs1,650 (vs. Rs1,190) implies 15%
upside. We are positive on domestic two-wheeler sales growth and BJAUT is
our top pick in the segment. BJAUT has multiple growth engines: 2-wheelers,
3-wheelers and a large export business. Bajaj’s dominant market share in 3-
wheelers and focus on premium 2-wheeler segments lend resilience to its
best-in-class margins.
Impact
Multiple drivers of growth. Bajaj has a well-diversified business model with
55% of sales coming from domestic 2-wheelers, 11% from domestic 3-
wheelers and 30% from exports in FY11. This diversification should support
revenue growth as well as margins for the company.
2-wheeler volume growth to remain strong. We expect Bajaj’s FY12 2-
wheeler sales to grow 18% YoY, ahead of the industry’s 16% YoY. As Honda
is likely to become more aggressive in the 2-wheeler market in India, we
expect BJAUT’s margins to be impacted, but to a much lesser extent than
Hero Honda. Growth in the 3-wheeler segment depends on legislation, which
remains unpredictable. We expect Bajaj’s 3-wheeler sales to grow 10% YoY
in FY12.
Exports to grow ahead of domestic business. ~30% of Bajaj’s sales come
from exports (2-wheeler + 3-wheeler). We expect exports to grow 25% YoY in
FY12, ahead of domestic business, driven by strong demand from Latam and
SE Asia. We do not expect Hero Honda to impact on Bajaj’s export business
materially, as it doesn’t have the products to challenge Bajaj’s key products
(Pulsar or 3-wheelers) that have worked in these high-growth export markets.
Focused strategy gives confidence on margin sustainability. We believe
Bajaj’s margins (the highest in the sector) are sustainable due to its larger
presence in the premium motorcycle segment, dominant market positioning in
the high-margin 3-wheelers and continued benefits from export sales.
Currently, Bajaj’s domestic motorcycle business has 250bp higher margin
than Hero Honda.
Earnings and target price revision
We expect BJAUT to see EPS CAGR of 15% between FY11-13E, led by a
17% CAGR in volumes. Our EPS estimates are 5-6% above consensus for
FY12-13E.
Price catalyst
12-month price target: Rs1,650.00 based on a DCF methodology.
Catalyst: Volume growth data and new product launches.
Action and recommendation
Bajaj Auto stock is trading at 13x FY12E PER, which is a 20% discount to
Hero Honda’s valuations. At our DCF-based target price, the stock would
trade at 15x FY12E PER, reflecting its strong earnings growth prospects, in
our view. We believe Bajaj should trade at a premium to Hero Honda, as it is
structurally favourably placed due to established in-house R&D and strong
umbrella brands.
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