Bajaj Auto-- Trade-off between margin and growth:: Macquarie Research,

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Bajaj Auto
Trade-off between margin and growth
Event
 Bajaj Auto reported better than expected 2Q results: revenue of Rs52.7bn and
adjusted profit of Rs7.9bn (excluding a notional loss of Rs954mn on currency
contract). However, we remain cautious on BJAUT growth going forward as
product refurbishments are behind schedule and competitive intensity is rising
in key markets India and Nigeria (25% of exports).
Impact
 Higher exports boosted sales and PAT. BJAUT reported revenue of
Rs52.7bn (+16%YoY volume and +4.3% YoY average realisation). Export
revenue grew 50%YoY, driven by a 38% increase in volume and 9% increase
in realisations. Adjusted PAT grew 17% YoY.
 Meets 20% margin guidance. EBITDA grew 22% to Rs10.6bn, with a margin
of 20.1% (↓60bp YoY). Sequential margin improvement of 100bp was due to
115bp decline in RM/sales. We believe adverse product mix in the domestic
market and reduction in export incentives will be offset by recent price hikes.
The company has increased price of domestic prices of Pulsar and Discover
by Rs500/bike (~1%) and export prices by 3.5%.
 Margin focus to impact volume growth. The company’s strategy to protect
margin may come at the cost of volume growth in both domestic and a key
export market, ie Nigeria, as price sensitivity is high in these markets.
Aggressive pricing and new model launches by Yamaha have led to a slide in
Bajaj’s market share in the premium segment for the last four quarters. After
expanding capacity (by March), Honda is also likely to dent Bajaj’s share, as
most of Honda’s premium bikes have ~6 months of waiting period currently.
 Sustaining export growth would be tough. The company’s export volume
increased 35%YoY in 1H, and we believe it will be difficult for them to
maintain similar growth due to deteriorating consumer sentiment globally.
Honda has recently launched a US$600 bike (Honda ACE) in Nigeria, where
they plan to sell 100k+ bikes a year. Hence, the recent price hike in export
markets could adversely impact volume growth.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,560.00 based on a DCF methodology.
 Catalyst: Monthly sales
Action and recommendation
 Remain cautious on volume growth. In view of emerging challenges, we
maintain cautious view on Bajaj Auto, as we think its strategy of maintaining
margin may come at a cost of market share loss due to increasing competitive
intensity in the two-wheeler segment. The stock is currently trading at 14x its
FY13E EPS, which we believe doesn’t truly reflect emerging risks ahead.