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Margins start to weaken
Bajaj’s 1Q net profit missed our estimates by 8% due to lower-than-expected
margins and other income. In the conference call, management commentary
on domestic 2W growth was a tad cautious but was more positive for 2W
exports and 3Ws. Focus seems to have shifted from ‘20% EBITDA margins’ to
‘growth in absolute EBITDA’. Anticipating higher 3W volumes, we keep our
estimates unchanged. Rising competition from HMSI in domestic and from
Hero Honda in export markets starting FY13 continues to drive our negative
stance though we view Bajaj as a good near-term defensive. U-PF stays.
Margins dip below 20% in 1Q
Bajaj’s 1Q EBITDA rose 17% YoY but missed our estimates by 6%. RM/Sales rose
a sharp 170 bps QoQ as prices hikes taken in Apr-11 were not commensurate with
the rise in input costs. EBITDA margins slipped 140bps QoQ to 19.1%. Control on
other expenditure was commendable despite higher ad-spend in Africa. Lower
other income (Rs10bn still due from state government for VAT rebates) resulted in
a higher 8% miss in net profit. Bajaj has not taken any major price hike since Apr
and with product-mix set to weaken with the launch of the ‘Boxer-150CC’, we
doubt that margins will cross 20% in balance FY12.
Strong outlook for exports and 3Ws
Bajaj is seeing robust demand in Nigeria and intends to take price hikes to offset
the removal of DEPB incentives. The Bangalore High Court has turned down a
‘Public interest litigation’ (PIL), which will open up 40,000 3W permits in the city
and should drive strong domestic 3W sales in balance FY12. However, this further
increases the risk of a sharp decline in domestic 3W sales in FY13 if more permits
don’t open up then. Bajaj expects FY12 domestic 2W growth at 13% (17% in 1Q).
The ‘Boxer-150CC’ could be a wild-card
Bajaj is planning to launch a low-priced 150CC ‘Boxer’ in 2QFY12 to target rural
consumers who want a higher powered bike at an affordable price. While we
recognize the need for such a product, we note that it is a bit risky to bet on the
success of this product given the tricky combination that Bajaj is targeting.
However, we note that from Bajaj’s perspective risk-reward is favourable given
that the incremental investment in this product would be very low.
We view Bajaj as a good near-term defensive but see risks FY13 onwards
Bajaj has performed in-line with the Sensex in YTD 2011. At current levels, we
view Bajaj as being fairly valued with limited absolute return potential on a 12m
view. Bajaj might outperform its 4W peers in the near-term given better volume
and earnings growth but we see risks on an FY13-view given that competition is
set to rise from HMSI and HH in domestic and export markets respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margins start to weaken
Bajaj’s 1Q net profit missed our estimates by 8% due to lower-than-expected
margins and other income. In the conference call, management commentary
on domestic 2W growth was a tad cautious but was more positive for 2W
exports and 3Ws. Focus seems to have shifted from ‘20% EBITDA margins’ to
‘growth in absolute EBITDA’. Anticipating higher 3W volumes, we keep our
estimates unchanged. Rising competition from HMSI in domestic and from
Hero Honda in export markets starting FY13 continues to drive our negative
stance though we view Bajaj as a good near-term defensive. U-PF stays.
Margins dip below 20% in 1Q
Bajaj’s 1Q EBITDA rose 17% YoY but missed our estimates by 6%. RM/Sales rose
a sharp 170 bps QoQ as prices hikes taken in Apr-11 were not commensurate with
the rise in input costs. EBITDA margins slipped 140bps QoQ to 19.1%. Control on
other expenditure was commendable despite higher ad-spend in Africa. Lower
other income (Rs10bn still due from state government for VAT rebates) resulted in
a higher 8% miss in net profit. Bajaj has not taken any major price hike since Apr
and with product-mix set to weaken with the launch of the ‘Boxer-150CC’, we
doubt that margins will cross 20% in balance FY12.
Strong outlook for exports and 3Ws
Bajaj is seeing robust demand in Nigeria and intends to take price hikes to offset
the removal of DEPB incentives. The Bangalore High Court has turned down a
‘Public interest litigation’ (PIL), which will open up 40,000 3W permits in the city
and should drive strong domestic 3W sales in balance FY12. However, this further
increases the risk of a sharp decline in domestic 3W sales in FY13 if more permits
don’t open up then. Bajaj expects FY12 domestic 2W growth at 13% (17% in 1Q).
The ‘Boxer-150CC’ could be a wild-card
Bajaj is planning to launch a low-priced 150CC ‘Boxer’ in 2QFY12 to target rural
consumers who want a higher powered bike at an affordable price. While we
recognize the need for such a product, we note that it is a bit risky to bet on the
success of this product given the tricky combination that Bajaj is targeting.
However, we note that from Bajaj’s perspective risk-reward is favourable given
that the incremental investment in this product would be very low.
We view Bajaj as a good near-term defensive but see risks FY13 onwards
Bajaj has performed in-line with the Sensex in YTD 2011. At current levels, we
view Bajaj as being fairly valued with limited absolute return potential on a 12m
view. Bajaj might outperform its 4W peers in the near-term given better volume
and earnings growth but we see risks on an FY13-view given that competition is
set to rise from HMSI and HH in domestic and export markets respectively.
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