Bajaj Auto – Results disappoint sharply::RBS

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1Q EBIDTA was 7.6% below our forecast due to raw material cost increases and weak domestic
product mix. We believe domestic market share pressure, seen in the past few quarters, and the
recent launch of Boxer 150cc will continue to put pressure on EBIDTA margins. Our EPS
forecasts and Sell rating are unchanged.


1Q results disappoint sharply on EBIDTA and PBT
Bajaj’s 1Q results revealed EBIDTA 7.6% lower than our forecast and PBT 9.6% lower. A sharp
spike in raw material expenses to net sales (up 170bp qoq and 140bp yoy) caused the EBIDTA
margin to collapse to 19.1%. This, coupled with a dip in other income, led to an even bigger
disappointment on PBT. A lower-than-expected tax rate helped reduce the impact on PAT.
Capital employed in the auto segment rose a sharp 37% qoq vs a 13.7% increase in sales.
Management noted that nearly half of the increase was attributable to cash stuck with state
government due to a delay in a sales tax refund.
We retain our EPS forecasts as 2Q should represent a peak in volumes
Sales volume momentum in recent months has been better than we expected on the export front,
whereas domestic segments face qoq market share pressure. We believe the product lifecycle of
the Discover family of motorcycles will peak by the start of this festival season, causing the
company’s total sales volume to peak in 2Q. Hence, we marginally increase our FY12 sales
volume forecast, but maintain our EBIDTA margin forecast at 19%, prompting us to leave our
EPS forecasts unchanged.
Brand-reshuffling strategy returns, we reiterate Sell
We believe the rise of the Discover brand (since 2009) is nearing its peak. We believe the
churning of engine capacities within this brand (100cc, 135cc, 125cc) helps it retain total brand
sales, but at the cost of its older engine configurations. However, with the company exhausting
engine configurations for the brand, the shift seems to be towards revitalising the Boxer brand
with 150cc engine capacity. We believe aggressive pricing of Boxer 150cc could be margindilutive
vs the Discover and Pulsar brands. This, coupled with bad 1Q results, could lead to a
downward revision in consensus EPS (RBS FY12-13F are 4-5% lower than Bloomberg
consensus). We believe the lack of clarity on continuation of the DEPB (duty entitlement
passbook) scheme will put pressure on valuations (PE). We reiterate Sell and just marginally
adjust our TP, which offers 25% potential downside from the current price.