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As per the Q3 earnings, exports are likely to be the medium term growth
driver for both sales volume and margin expansion. The company expects
a strong 30+% growth in exports volume continuing in FY13 as well. It
implies a higher profitability and provides room for increasing promotion
costs to push sales in the sluggish domestic market. In our view, monthly
export numbers and new Pulsar launch in Q4FY12 are key near term
triggers. We have lowered our domestic sales volume, but have
increased exports. We have marginally lowered our FY13 EPS to INR132
(from INR134) which is 10% ahead of consensus. The stock is trading at a
historic low multiple of 11xFY13 PE and adequately captures domestic
slow‐down, but ignores growth potential of exports. Reiterate ‘BUY’ with
TP of INR1,920 (14x FY13E core EPS).
Steady exports to offset domestic weakness
The company has not seen any slow‐down in demand from Nigeria. It expects growth
momentum in exports to continue in FY13 as well and Africa to be the key market. It
should make up for poor domestic demand which is going through a soft patch due to
weak consumer sentiments. The company is pinning hopes on the launch of new Pulsar
in Q4FY12 to bring back the demand momentum. In our view, strong monthly export
sales numbers and new launches should act as a near term positive trigger.
Product mix improvement to aid margin expansion
Higher contribution from exports, three wheelers and premium bikes in total sales
should aid margin expansion of 120bps in FY13 despite building in a sharp jump in
promotion costs to aid new launches in a sluggish domestic environment.
Outlook and valuation: Favourable; maintain ‘BUY’
Robust exports demand, margin levers and new launches make the company’s outlook
favourable. Cut in domestic sales growth forecast (3% from 8% earlier) is compensated
for by an increase in exports growth in FY13 (25% vs earlier expectation of 15%). We
have marginally tweaked our FY13 EPS to INR132 from INR134. We retain Buy as we
believe the stock is trading at a historic low multiple of 11xFY13 PE. Our target price of
INR1920 implies 14x FY13 core EPS of INR122 plus discounted cash/share of INR210.
Key takeaways from the earnings conference call
Domestic market
• The company expects 5%‐6% growth in domestic two wheeler industry in Q4FY12. This
is quite low compared to +10% growth expected by its closest competitor, Hero
Motocorp.
• It targets monthly sales of 18,000‐19,000 units of three‐wheeler in the next six months.
The run rate can be higher if permit opens up in Karnataka and Delhi.
Export markets
• The company has not experienced any slowdown in exports so far. It has maintained its
earlier guidance (for exports) of 1.5mn units in FY12.
• Further, it has given a healthy guidance of +30 % growth in FY13 as well.
• Africa contributes ~45% to total exports and will remain the key growth market for the
company
• On Nigeria issue, it sounded not much concerned.
Forex cover
• Average USD/INR rate was 49.4 in Q3FY12 compared to 47.8 in Q2FY12 for exports
realizations.
• 70% of FY13 exports have already been covered. Earlier, USD/INR contracts were taken
at 47‐49 (H2FY12) and later at 47‐51.
Other highlights
• Benefits of falling commodity prices were absent in the quarter due to weak INR. The
company sees no benefit in Q4FY12 as well.
• 3.5% hit on export revenues on a/c of DEPB removal on 1st Oct 2011 was entirely
passed on to dealers.
• Also, it enjoyed an additional benefit of 1% on a/c of FMS from 1st Oct 2011. The
management hinted that it might give up this benefit in some export markets going
forward in the form of promotional expenses or others.
• RE60: The management seemed very much optimistic on the success of RE60. They are
on track to commercially launch the product in exports markets though, no time line is
set for India due to uncertainty in government approvals.
• They maintained their faith on low spend in normal ad expenses except for new
launches. This is despite heavy ad expenses from Hero Motocorp, its closest competitor
Company Description
BAL is the second largest two‐wheeler manufacturer in India with a domestic market share
of 28%. It offers products in all motorcycle segments—Platina (entry), Discover (executive)
and Pulsar (premium). It is also the largest three‐wheeler manufacturer in India. Post the
demerger in May 2008, BAL has been solely focused on the automobile business. In the past
few years, the company has shown strong growth in exports that now forms nearly 35% of
its total volumes.
Investment Theme
Bajaj Auto is a diversified play with domestic motorcycle, three wheeler and export portfolio.
Whilst Africa continues to drive exports growth, new launches in domestic segment are
likely to create excitement in the domestic market. Cut in interest rates are positive for
premium bikes demand where Bajaj auto is the largest player
Key Risks
Increasing competition
Intense competition could hit profitability; The risk could play out in FY14‐15 when‐ever
Honda choose to launch cheap Chinese bikes. The probability at the moment is low
Problems in exports market
Any disruption in key African market could affect exports numbers
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
As per the Q3 earnings, exports are likely to be the medium term growth
driver for both sales volume and margin expansion. The company expects
a strong 30+% growth in exports volume continuing in FY13 as well. It
implies a higher profitability and provides room for increasing promotion
costs to push sales in the sluggish domestic market. In our view, monthly
export numbers and new Pulsar launch in Q4FY12 are key near term
triggers. We have lowered our domestic sales volume, but have
increased exports. We have marginally lowered our FY13 EPS to INR132
(from INR134) which is 10% ahead of consensus. The stock is trading at a
historic low multiple of 11xFY13 PE and adequately captures domestic
slow‐down, but ignores growth potential of exports. Reiterate ‘BUY’ with
TP of INR1,920 (14x FY13E core EPS).
Steady exports to offset domestic weakness
The company has not seen any slow‐down in demand from Nigeria. It expects growth
momentum in exports to continue in FY13 as well and Africa to be the key market. It
should make up for poor domestic demand which is going through a soft patch due to
weak consumer sentiments. The company is pinning hopes on the launch of new Pulsar
in Q4FY12 to bring back the demand momentum. In our view, strong monthly export
sales numbers and new launches should act as a near term positive trigger.
Product mix improvement to aid margin expansion
Higher contribution from exports, three wheelers and premium bikes in total sales
should aid margin expansion of 120bps in FY13 despite building in a sharp jump in
promotion costs to aid new launches in a sluggish domestic environment.
Outlook and valuation: Favourable; maintain ‘BUY’
Robust exports demand, margin levers and new launches make the company’s outlook
favourable. Cut in domestic sales growth forecast (3% from 8% earlier) is compensated
for by an increase in exports growth in FY13 (25% vs earlier expectation of 15%). We
have marginally tweaked our FY13 EPS to INR132 from INR134. We retain Buy as we
believe the stock is trading at a historic low multiple of 11xFY13 PE. Our target price of
INR1920 implies 14x FY13 core EPS of INR122 plus discounted cash/share of INR210.
Key takeaways from the earnings conference call
Domestic market
• The company expects 5%‐6% growth in domestic two wheeler industry in Q4FY12. This
is quite low compared to +10% growth expected by its closest competitor, Hero
Motocorp.
• It targets monthly sales of 18,000‐19,000 units of three‐wheeler in the next six months.
The run rate can be higher if permit opens up in Karnataka and Delhi.
Export markets
• The company has not experienced any slowdown in exports so far. It has maintained its
earlier guidance (for exports) of 1.5mn units in FY12.
• Further, it has given a healthy guidance of +30 % growth in FY13 as well.
• Africa contributes ~45% to total exports and will remain the key growth market for the
company
• On Nigeria issue, it sounded not much concerned.
Forex cover
• Average USD/INR rate was 49.4 in Q3FY12 compared to 47.8 in Q2FY12 for exports
realizations.
• 70% of FY13 exports have already been covered. Earlier, USD/INR contracts were taken
at 47‐49 (H2FY12) and later at 47‐51.
Other highlights
• Benefits of falling commodity prices were absent in the quarter due to weak INR. The
company sees no benefit in Q4FY12 as well.
• 3.5% hit on export revenues on a/c of DEPB removal on 1st Oct 2011 was entirely
passed on to dealers.
• Also, it enjoyed an additional benefit of 1% on a/c of FMS from 1st Oct 2011. The
management hinted that it might give up this benefit in some export markets going
forward in the form of promotional expenses or others.
• RE60: The management seemed very much optimistic on the success of RE60. They are
on track to commercially launch the product in exports markets though, no time line is
set for India due to uncertainty in government approvals.
• They maintained their faith on low spend in normal ad expenses except for new
launches. This is despite heavy ad expenses from Hero Motocorp, its closest competitor
Company Description
BAL is the second largest two‐wheeler manufacturer in India with a domestic market share
of 28%. It offers products in all motorcycle segments—Platina (entry), Discover (executive)
and Pulsar (premium). It is also the largest three‐wheeler manufacturer in India. Post the
demerger in May 2008, BAL has been solely focused on the automobile business. In the past
few years, the company has shown strong growth in exports that now forms nearly 35% of
its total volumes.
Investment Theme
Bajaj Auto is a diversified play with domestic motorcycle, three wheeler and export portfolio.
Whilst Africa continues to drive exports growth, new launches in domestic segment are
likely to create excitement in the domestic market. Cut in interest rates are positive for
premium bikes demand where Bajaj auto is the largest player
Key Risks
Increasing competition
Intense competition could hit profitability; The risk could play out in FY14‐15 when‐ever
Honda choose to launch cheap Chinese bikes. The probability at the moment is low
Problems in exports market
Any disruption in key African market could affect exports numbers
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