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Weakness in domestic markets leads us to cut volume targets
With domestic volume growing by just 7% YTD due to demand softness and
competition, Bajaj Auto reported a qoq decline of 4% in topline at Rs50.6bn,
while on a yoy basis, this was 21% up. Domestic total volumes declined by 6%
qoq to 6.94 lakh units, as the two wheeler market started facing a slowdown
from November end. December numbers of the company were significantly below
our expectations. Higher cost of ownership clubbed with high interest rates
and rising fuel prices has been troubling the company. Due to this, we have
cut our domestic volume estimates for FY 12E/FY 13E to 2.83mn/3.01mn
respectively.
New launches in domestic markets and RE60 in export markets to help volume
growth in FY 13
Exports sales for the quarter were down 10% qoq considering competition in
markets like Africa from Honda and overall global demand softness. Exports
contributed 35% of sales this quarter and with expected launch of the
recently launched commercial 4wheeler RE60 in the Sri Lankan markets in May
2012 will help the company to increase the contribution of exports to total
volumes. With new launches of the high margin KTM bikes, Pulsar variant and
Discover variant in the ensuing quarters, we may witness Bajaj Auto
weathering the weakness in demand observed off late. We expect exports to
grow at 24%/18% in FY12E/13E to 1.49mn/1.77mn respectively and the total
volumes to grow at 13%/11%.
Robust margins assisted by weaker rupee, price hikes and easing RM prices
Bajaj Auto reported a solid 21% EBITDA margin during the quarter which was
an increase of 90 bps qoq and 70 bps yoy. This was mainly due to weak rupee
and impact of easing commodity prices (RM to sales was at 70.4% v/s71.4%
qoq). Also the company had taken price hike of Rs500 per vehicle in October
which helped them to obtain auto industry's highest margins globally. PAT
adjusted for derivative loss of Rs 589 mn came in at Rs8340mn, which was way
above our expectations helped by better than expected operating performance
despite volumes being weak. Tax rate was at 27% as against 28.5% qoq.
Outlook and valuation
Given the weak domestic performance by Bajaj Auto we are cutting our volume
estimates for the company while maintaining our margin estimates. In order
to quantify our caution on the stoxck, we are assigning a lower multiple to
Bajaj Auto at 13.5x from our previous multiple of 15x. We have cut our
earnings estimates by 4% each for the FY12E and FY 13E. With the price
correcting by ~23% in a quarter, the stock looks attractive from current
levels. At CMP of Rs 1467, the stock trades at 12.2x times FY13E EPS of Rs
120. With robust margin profile and opportunities in the export markets, we
prefer this stock over its peers. However, from CMP of Rs 1558, we believe
there is a limited upside for the stock. Hence, we downgrade our Bajaj Auto
to Neutral from BUY while reducing our target price to Rs 1645 (includes Rs
21 from KTM business value).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Weakness in domestic markets leads us to cut volume targets
With domestic volume growing by just 7% YTD due to demand softness and
competition, Bajaj Auto reported a qoq decline of 4% in topline at Rs50.6bn,
while on a yoy basis, this was 21% up. Domestic total volumes declined by 6%
qoq to 6.94 lakh units, as the two wheeler market started facing a slowdown
from November end. December numbers of the company were significantly below
our expectations. Higher cost of ownership clubbed with high interest rates
and rising fuel prices has been troubling the company. Due to this, we have
cut our domestic volume estimates for FY 12E/FY 13E to 2.83mn/3.01mn
respectively.
New launches in domestic markets and RE60 in export markets to help volume
growth in FY 13
Exports sales for the quarter were down 10% qoq considering competition in
markets like Africa from Honda and overall global demand softness. Exports
contributed 35% of sales this quarter and with expected launch of the
recently launched commercial 4wheeler RE60 in the Sri Lankan markets in May
2012 will help the company to increase the contribution of exports to total
volumes. With new launches of the high margin KTM bikes, Pulsar variant and
Discover variant in the ensuing quarters, we may witness Bajaj Auto
weathering the weakness in demand observed off late. We expect exports to
grow at 24%/18% in FY12E/13E to 1.49mn/1.77mn respectively and the total
volumes to grow at 13%/11%.
Robust margins assisted by weaker rupee, price hikes and easing RM prices
Bajaj Auto reported a solid 21% EBITDA margin during the quarter which was
an increase of 90 bps qoq and 70 bps yoy. This was mainly due to weak rupee
and impact of easing commodity prices (RM to sales was at 70.4% v/s71.4%
qoq). Also the company had taken price hike of Rs500 per vehicle in October
which helped them to obtain auto industry's highest margins globally. PAT
adjusted for derivative loss of Rs 589 mn came in at Rs8340mn, which was way
above our expectations helped by better than expected operating performance
despite volumes being weak. Tax rate was at 27% as against 28.5% qoq.
Outlook and valuation
Given the weak domestic performance by Bajaj Auto we are cutting our volume
estimates for the company while maintaining our margin estimates. In order
to quantify our caution on the stoxck, we are assigning a lower multiple to
Bajaj Auto at 13.5x from our previous multiple of 15x. We have cut our
earnings estimates by 4% each for the FY12E and FY 13E. With the price
correcting by ~23% in a quarter, the stock looks attractive from current
levels. At CMP of Rs 1467, the stock trades at 12.2x times FY13E EPS of Rs
120. With robust margin profile and opportunities in the export markets, we
prefer this stock over its peers. However, from CMP of Rs 1558, we believe
there is a limited upside for the stock. Hence, we downgrade our Bajaj Auto
to Neutral from BUY while reducing our target price to Rs 1645 (includes Rs
21 from KTM business value).
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