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Volumes rise, while margins fall in the opening quarter of FY12.
Bajaj Auto’s topline for the quarter came in 22% higher on a yoy basis. Volumes for the quarter were 18% up yoy at 1,092,815 units. Net realizations were down by 1.8% qoq on adverse product mix, wherein Pulsar 135cc sales were low and Discover sales were high. EBITDA margins came in at 19.1% due to high commodity prices and adverse product mix. Net profits were 15% up to `7.1bn, slightly below our expectations due to subdued performance at operating levels.
Expected margin fall on Boxer launch to be somewhat negated by higher volumes on the 3W side
Bajaj Auto will launch the Boxer 150cc in August which will be targeted towards volume segment and hence derive lower margins. However, the company will witness a boost in volumes which is expected to push the total monthly sales above 4 lakh units, though Platina sales are expected to get cannibalized to some extent by Boxer. Also the launch of Pulsar variant in the latter part of the year will help maintain margins for the year in the range of 19-19.5%. On the 3W side, management is expecting a significant traction in sales due to opening up of 40,000 permits in Karnataka and many such permits in other states across India (the upcoming one in Maharashtra). This will boost the volumes as well as margins of Bajaj Auto. Any softening of commodity prices will provide an upside to our margin expectation of 19.2% for FY 12.
Ramp up of production at Pantnagar to aid bottomline performance
The Pantnagar plant produced 293,000 units in Q1 FY12. The company expects to produce 1.4-1.5 mn units from this plant in FY 12. The company produces Platina and Discover from this plant. With increasing demand for Discover, the company expects a significant ramp of production from this plant, which will help the company to improve its margin performance and save taxes in the rest of the quarters of FY 12 and in FY 13. We expect FY 12 tax rate at 26.5%.
DEPB withdrawal to be compensated by other schemes and price hikes in export markets
The withdrawal of DEPB benefit in the export markets will be compensated by the Focus Market Benefit Scheme (2%) and Duty Drawback Scheme (1.5-2%). The remainder will be compensated through cutting of dealer margins and taking price hikes. The company expects this to somewhat affect volume performance in the export markets, but margin maintenance will be the preference. In spite of this, the demand in export markets especially Africa (45% of export volumes) is expected to remain buoyant. Management expects a 20% growth in exports going forward.
Outlook and valuation
Considering the company’s growing strength in the domestic and the export (2W as well as 3W) markets with bearing on strong ROE performance(above 40%) and robust cash-flows, Bajaj Auto remains our top pick in the auto pack. We maintain our estimates and Outperform rating on the stock with a TP of Rs.1, 647 (Rs.1, 622 from standalone operations @ 13.5x times, and Rs.25 from Indonesia and KTM businesses).
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