Bajaj Auto 4Q results: Better than expected ::Macquarie Research

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Bajaj Auto
4Q results: Better than expected
Event
 Bajaj Auto reported 4QFY11 results with revenue of Rs42bn and net profit of
Rs6.7bn, adjusted to Rs7.2bn including exceptional gains. EBITDA and
adjusted PAT were 3% and 5% ahead of our expectation on account of betterthan-
expected margins. We reiterate our Outperform recommendation.
Impact
 4Q results above our expectations. Bajaj Auto reported net sales of Rs42bn
(up 23.5% YoY), driven by 17% volume growth and 5.4% increase in average
realisation. EBITDA and adjusted PAT came in at Rs8.6bn (up 11% YoY) and
Rs6.7bn (up 20% YoY), respectively.
 Better-than-expected EBITDA margin. Bajaj Auto reported EBITDA margin
of 20.5% (down 236bp) in 4Q, ahead of company guidance of ~20%.
However, EBITDA margin declined 236bp YoY on account of respective
162bp and 56bp declines in raw material and employee costs as a % of sales.
 Better placed to maintain margin. We believe Bajaj has been able to
manage its margin better than its competitors and will benefit significantly in
case of reversal in raw material costs. Superior margin has been supported by
a higher proportion of premium motorcycle sales and three-wheeler portfolio.
Management has also stated the worst may be behind in terms of further input
cost inflation despite continued near-term raw material cost pressure.
 Volume guidance of 4.6mn vehicles in FY12E maintained. Bajaj Auto
expects ~20% volume growth in FY12E to 4.6mn vehicles, and motorcycle
volume of ~4.1-4.2mn in FY12E. We believe the company is well placed to
achieve ~20% volume growth in FY12E amidst little sign of growth slowdown
in domestic motorcycle segment and export markets.
 Better placed to face competition. Bajaj has been facing competition from
Honda (HMSI) for some time and has maintained its market leadership
position (~50% market share) in the premium motorcycle segment. Further,
Bajaj increased market share in premium motorcycle segment by 4% in FY11.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,650.00 based on a DCF methodology.
 Catalyst: Strong volume growth data
Action and recommendation
 Outperform maintained. Bajaj’s Auto stock is trading at 12x FY12E PER,
which is a 30% discount to Hero Honda’s valuation. We believe the valuation
discount is not justified due to its resilient margin performance, along with
structural superiority due to established in-house R&D and strong brands. Our
target price implies 26% upside for the stock.