Bajaj Auto: Expectations toned down after dismal performance  Relaince Sec

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Expectations toned down after dismal performance
 Weak performance in December 2011: Bajaj Auto Limited (BAL) reported sales
of 305,690 units for the month of December 2011 which translates to ~10% yoy
growth. Motorcycles sales stood at 263,999 units (+8% yoy) while
three-wheelers sales saw a robust growth of ~27% yoy to reach 41,991 units.
However, the more than 20% month-on-month decline in motorcycles sales was
disappointing. Three-wheelers sales saw a moderate decline of 1.2% on the
m-o-m basis in December 2011. One of the possible reasons contributing to the
decline in sales was the plant shutdown of 4-5 days which we believe could
have impacted the motorcycles sales by ~5%. The other reason attributable for
the decline in sales was the weak demand post the festive season.
 Downward revision in guidance: Management has indicated that the domestic
motorcycle industry was sluggish post festival season and expects the
sluggishness to continue in this quarter. Management has revised its sales
guidance downwards for FY2012 and now expects to sell ~4.4mn units as
compared to its previous guidance of 4.5mn units. Management has stated that
volume growth of 20-25% would be tough given the tapering demand from the
retail segment. However, it is confident of reporting a 20% growth in value
terms. On the margin front, management is optimistic to end the year with an
EBITDA margin of ~20%.
 Impact: Considering the weakening macro-economic environment, high interest
rates and its lagged impact on two-wheelers segment, we are revising our
estimates marginally downwards. We now expect a top-line growth of ~18%
broadly in line with the Management’s guidance of 20%, while we take a
relatively conservative stance on EBITDA margin and expect it to be at 19.5%
against management’s forecast of 20% for FY2012.
Outlook and Valuation
We had expected the sales to decline in the month of December considering the
end of festival season. However, the decline was far steeper than anticipated (even
after adjusting for the plant shutdown). We had a positive outlook on the stock since
July 2011 (CMP ~Rs1,400). Since then, the stock had appreciated more than 20%
to outperform the market and cross our target price of Rs1,696 in December 2011
post which we downgraded our recommendation to Neutral. Given the current shortterm
uncertainties surrounding the company and the two-wheeler segment at large,
we would prefer to adopt a cautious stance and believe that our revised estimates
may have further downside risks. At the CMP of Rs1,481 the stock is available at a
P/E of 14.5x and 13.0x its FY2012E and FY2013E EPS respectively. We continue
to maintain our Neutral view on the stock with a fair value of Rs1,482.
Risks to the view
 Higher than expected slowdown in sales, as the high interest rates have
their lag impact, poses a downside risk to our estimates/view
 Higher than anticipated increase in raw material prices poses a downside
risk to our estimates/view