Bajaj Auto (BJAUT IN)
N: Growth in the slow lane
Weak market conditions coupled with market share losses
affect growth
Margins could come under pressure as well in FY13, owing
to a weak outlook for three wheelers and premium bikes
Maintain Neutral rating; cut TP to INR1,700 (from INR1,745)
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Bajaj is battling headwinds on numerous fronts: First, the industry is seeing twowheeler
(2W) buyers downgrading to the economy segment from the executive segment.
This is adversely impacting the realization of 2W companies, particularly Bajaj. Second,
scooters are growing faster than the overall 2W market, where Bajaj has no presence. And
lastly, not only is the overall 2W market slowing down, but competitive intensity has
resulted in Bajaj’s market share decline in both the premium as well as executive segment
(charts 6-9). Furthermore its exports business is impacted by the hike in import duty in Sri
Lanka. There is minimal clarity on domestic demand of three wheelers as well.
There are some greenshoots as well but not enough to offset the headwinds: With the
launch of the new Discover we expect some recovery in the market share of Bajaj in the
executive segment. Remember Bajaj lost 4.2% market share in the executive segment in
the past six months. The upcoming launch of Pulsar 200 NS is also likely to showcase
Bajaj’s R&D strength and improve brand perception. Additionally exports continue to
grow stronger than the domestic demand and are expected to grow 15-20% y-o-y as per
the management (including the SriLanka impact). A weaker INR may improve export
realisations in FY13 and FY14 as well.
EBITDA margins for the quarter declined marginally to 20.7% from 21% in the 3Q12.
Downward pressure on realisation due to unfavourable product mix and increase in raw
material costs is the primary risks to margins in FY13. The currency depreciation benefit
on exports is limited as well, as Bajaj has 85% of its exports covered for FY13 in the
range of INR48-51 versus USD.
Valuation: Bajaj is currently trading at 14x our FY13 earnings. We expect 2W market to
grow by 11% in FY13 (MotorCycle by c10% and scooters by c16%). We forecast Bajaj
volumes to grow by c9.5% in FY13 and 11.5% in FY14. Benefit from better export
realization and price increase to help maintain our top-line growth forecasts. We estimate
a 50bps decline in margins for FY13 to 19.7% owing to the changing product mix, input
cost headwinds offset by currency tailwinds. We cut our FY13 /FY14 earnings estimate
marginally by 1% and 2% respectively. We value the company based on DCF to arrive at
a target price of INR1,700 (from INR1,745) and remain Neutral on the stock. Our target
price implies a PE multiple of 13x on our FY14 earnings.
4Q12 Excerpts
Bajaj reported revenues of INR46.5b, 10.7% y-o-y, which is in line with our estimates of INR 47b if we
include the operating income of INR0.52b that has been reclassified into other income. Average selling
price per vehicles was down 1% q-o-q, in line with our estimates on account of weaker product mix and
currency appreciation in the 4Q. As per the change in accounting the operating income includes only
scrap sales, royalty and DEPB which accounted for 3% of net revenues. On a like to like basis the
operational other income was 4.2% of net revenues compared to 4.6% in 3Q12 and 3.7% in 4Q11.
EBITDA margins for the quarter declined marginally to 20.7% from 21% in the 3Q12, mainly on account
of increase in other expenditure. Raw material costs including inventory change was flat sequentially at
70.4%. The down trading of bikes is the primary margin risk to Bajaj going into FY13. The currency
depreciation benefit on exports is limited as well, as Bajaj has 85% of its exports covered for FY13 in the
range of INR48-51 versus USD.
The new Discover series is expected to push sales volume for the company in FY13, while we do not see
the new Pulsar 200 NS (expected in the next couple of weeks) to add significantly to the volume growth.
We believe the bike will be priced at the higher end of the premium category which is currently growing
slower than the overall two wheeler market (please refer to chart 1).
Conference call updates
The management is seeing a slowdown in the two wheeler market in the near term and expects the
growth to be back ended for FY13. Further the delay in introduction of new three wheeler permits
expected to strain domestic three wheeler sales as well. Nevertheless export volume growth (except
Sri Lanka) continues to remain strong and is expected to grow 15-20% y-o-y in FY13.
The duty increase in Sri Lanka has shot up retail prices of three wheelers by c32% and for two
wheelers by c29%. The steep increase in price should impact the near term export volumes to Sri
Lanka. Management expects a loss of 25,000 units of two wheelers and three wheelers each, in view
of the duty hike in FY13.
The new Discover series is expected to push sales volume for the company in FY13, while we do not
be see the new Pulsar 200 NS (expected in the next couple of weeks) to add significantly to the
volume growth. We believe the bike will priced at the higher end of the premium category which is
currently growing slower than the two wheeler market (please refer to chart 1).
The company invested INR 308.4m in Research and Development in FY12 and expects to launch one
new Pulsar and one new Discover series from their latest platform in the coming years. The capital
expenditure for FY12-14 is guided to be INR 5b.
The Pantnagar plant is currently running at 60% utilization and has a capacity of producing 1.8m
bikes per annum. The management is cautious on capacity expansion plans reflecting the weak
demand outlook.
Three wheelers domestic/export sales have margin of around 30% and 33% respectively. The lack of
three wheeler demand visibility in our opinion could further hurt margins in the near term.
Valuation
Bajaj is currently trading at 14x our FY13 earnings. We expect 2W market to grow by 11% in FY13 (MC
by c10% and scooters by c16%). We forecast Bajaj volumes to grow by c9% in FY13 and 11.5% in
FY14. Benefit from better export realization and price increase to help maintain our top-line growth
forecasts. We estimate a 50bps decline in margins for FY13 to 19.7% owing to the changing product mix,
input cost headwinds offset by currency tailwinds. We cut our FY13 /FY14 earnings estimate marginally
by 1% and 2% respectively. We value the company based on DCF methodology. We assume a risk free
rate of 3.5%, cost of equity of 11% and cost of debt of 9.2% as per the HSBC method, and arrive at a
WACC of 11% for Bajaj. Terminal growth rate is assumed to be 4.5%. Our DCF analysis values Bajaj at
INR1,700 (from INR 1,745), implying a multiple of 13x on FY14e EPS.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for Indian stocks of 11%. Our target price of INR1,700 implies a potential return of
7.9%, which is in the Neutral band; therefore, we rate the stock Neutral. Potential return equals the
percentage difference between the current share price and the target price, including the forecast dividend
yield when indicated.
Risks
On the downside, increasing intensity of competition is a significant threat for Bajaj in both the premium
and economy segment. Bajaj, due to its significant proportion of exports, is subject to changes in
regulations (such as the hike in duty in SriLanka) which could have a material affect on earnings. On the
upside, Bajaj with a history of new launches and quick technology adoption has often delivered vehicles
that have boosted sales in the year of launch. The success of the new Discover series and Pulsar is the key
upside risk to our estimates.
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