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India Equity Research Reports, IPO and Stock News
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● Assume coverage with NEUTRAL. We assume coverage of
Bajaj Auto with a DCF-based target price of Rs1,552, which
translates to 14.5x (15% discount to Hero Motocorp) FY13 EPS.
● Margins will gradually trend lower. With product mix in the
domestic market worsening and exports being driven by the lower
margin African market, Bajaj Auto’s margins will gradually trend
lower. Additionally, if DEPB does not get extended beyond Dec
2011, for 3% reduction in benefit margins will fall by 70 bp.
Moreover, the substitution of higher margin three-wheelers with
four-wheel LCVs can further deteriorate margins medium term.
● Domestic volume momentum slowing down. Bajaj Auto’s
domestic volume momentum has slowed down significantly in the
last few months, because of Discover volumes peaking and sales
in the premium segment slowing.
● Prefer Hero Motocorp to Bajaj Auto. With the margin trend
between Bajaj Auto and Hero Honda reversing, we believe Bajaj
Auto will trade at a discount to Hero Honda.
Product mix deterioration will affect margins
We believe that Bajaj Auto’s product mix has clearly peaked, and the
share of lower-margin entry segment bikes is likely to increase in the
future. The mix has already started to worsen in the last few months,
with the share of the entry-level segment increasing from 13% to 23%
at the expense of the higher-margin executive segment. The
upcoming launch of the Boxer 150cc could further this trend. Bajaj
Auto’s volumes in the premium segment have also started declining.
Also, on the exports side, volume growth is being driven by Africa
where margins on motorcycles are lower, as the company competes
with Chinese manufacturers. The withdrawal of the Duty Entitlement
Passbook Benefit (DEPB) scheme could also greatly hurt the
company, as its margins would be affected by 70 bp for every 3%
reduction in export benefits, and EPS would fall by 3%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Assume coverage with NEUTRAL. We assume coverage of
Bajaj Auto with a DCF-based target price of Rs1,552, which
translates to 14.5x (15% discount to Hero Motocorp) FY13 EPS.
● Margins will gradually trend lower. With product mix in the
domestic market worsening and exports being driven by the lower
margin African market, Bajaj Auto’s margins will gradually trend
lower. Additionally, if DEPB does not get extended beyond Dec
2011, for 3% reduction in benefit margins will fall by 70 bp.
Moreover, the substitution of higher margin three-wheelers with
four-wheel LCVs can further deteriorate margins medium term.
● Domestic volume momentum slowing down. Bajaj Auto’s
domestic volume momentum has slowed down significantly in the
last few months, because of Discover volumes peaking and sales
in the premium segment slowing.
● Prefer Hero Motocorp to Bajaj Auto. With the margin trend
between Bajaj Auto and Hero Honda reversing, we believe Bajaj
Auto will trade at a discount to Hero Honda.
Product mix deterioration will affect margins
We believe that Bajaj Auto’s product mix has clearly peaked, and the
share of lower-margin entry segment bikes is likely to increase in the
future. The mix has already started to worsen in the last few months,
with the share of the entry-level segment increasing from 13% to 23%
at the expense of the higher-margin executive segment. The
upcoming launch of the Boxer 150cc could further this trend. Bajaj
Auto’s volumes in the premium segment have also started declining.
Also, on the exports side, volume growth is being driven by Africa
where margins on motorcycles are lower, as the company competes
with Chinese manufacturers. The withdrawal of the Duty Entitlement
Passbook Benefit (DEPB) scheme could also greatly hurt the
company, as its margins would be affected by 70 bp for every 3%
reduction in export benefits, and EPS would fall by 3%.
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