Bajaj Auto - Strong show continues : LKP

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Robust volume performance aids a 20% topline growth

A strong 16.4% yoy growth in volume performance coupled with an improved product mix leading to 3% yoy and 2% qoq growth in realizations led to a 20% increase in topline of Bajaj Auto. The company reported volumes of 1.16 mn in the quarter which saw the launch of Boxer 150 cc which sold ~10,000 units in the first month of its sale, i.e. September. Exports were also robust, particularly in Africa, reporting about 21% yoy growth to 0.42 mn in totality. Going forward, the company has maintained a 20% volume guidance for FY 12 which we believe is very likely considering the solid domestic as well as export demand. With 130 dealers having come on stream, good monsoon and new launches (Boxer 150 cc and a Pulsar upgrade lined up for Q4 FY12), we do not foresee any risk to the volume target. Management is targeting to increase their capacity to 5.5 mn from 5 mn through setting up new machinery which would cater to the robust demand (Bajaj Auto currently operates at 100% capacity utilization)

Margins back in the 20% zone, a boost to our confidence

Bajaj Auto reported a 20.1% EBITDA margin during the quarter which was a bounce back from the previous quarter (19.1%). This was mainly due to improved product mix (higher number of Pulsar sold) and impact of easing commodity prices. Going forward, the management has maintained their guidance of 20% margins for the full year. We believe the price hike taken in October (`500 on Pulsar and Discover), easing commodity prices and improving product mix along with 3.5% price hike taken in export markets to negate the impact of DEPB withdrawal may enable the company to report a 20%+ margins in FY 12. Post the capacity expansion of 3W, Bajaj Auto has started posting record 3W volumes which are above 45,000 units consistently. Due to the high margin nature of 3Ws, we expect margins to get a strong support.

DEPB withdrawal to be compensated by other schemes

The total export benefits which were at 11.5% before September is just 2% lower henceforth. The Duty Drawback Scheme will provide 5.5% benefit with 1% over and above it which is the tradable certificate given till March 2012. Additionally under the FMS scheme the company will get benefited by another 3% at least for motor cycles which would take the total benefit to 9.5%. The price hike taken in the export markets of 3.5% will compensate for the 2% loss. Any further compensation will be done by the company by cutting dealer margins.

Outlook and valuation

In view of the robust Q2 results wherein there was a bounce back in margins in the range of 20% and a solid volume growth,we expect a 19%/15% volume growth in FY12/13E and margins of 19.8%/20.6% in the same period. We have raised our estimates and target price on capacity expansion, margin growth on new launches, improved product mix and strong 3 W sales. We maintain BUY on the stock with a target price of `1,893.