Bajaj Auto - “New model launches to support FY 14 growth” ::LKP

Results above expectations

Bajaj Auto’s Q2 FY13 numbers came in above our expectations as net sales including other operating income came in at Rs49.7 bn, which was 2.2% up qoq and down by 4.1% yoy. Realizations were up 8% yoy and 5.5% qoq to Rs 48,614 which somewhat offset the 10% yoy decline in volumes to 1.049 mn. Domestic volumes declined by 11% yoy and 1% qoq, while exports declined by 8% yoy and 6% qoq mainly on weak market conditions in Sri Lanka, Egypt, Iran and Argentina. At the EBITDA levels, RM costs to sales dipped to 71.77% from 72.1% qoq and 72.56% yoy. EBITDA margins were up to 18.4% from 17.9% qoq , but was lower on a yoy basis by 40 bps. Staff costs declined sequentially as a % of sales from 3.4% to 3.2%. Rise in other expenses due to derivative and MTM losses came in at 7.2% of sales, which was higher than 6.4% yoy and 7.1% qoq. Higher tax rates at 28.5% v/s 25.7% yoy due to Pantnagar sops going out from last quarter pulled the profits down by 10% yoy, while they were 3% above qoq.

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Outlook and valuation

Given the expectation of revival in demand through new launches in a weak domestic environment and gaining strength in Africa, SE Asia and Latam we expect the worst for Bajaj Auto is behind them now. With second half expected to do better along with pan India launch of Pulsar 200NS and new launch of a 100cc motorcycle during in Dec-Jan, we expect motorcycles to do well going forward and show a good recovery, especially in FY 14. With RE 60 getting launched in a quarter, 3W exports may get a fillip. With price hikes taken, RM prices expect aluminium and some alloys softening a bit and 3W sales in exports improving, we see better margins in the ensuing quarters. However, at CMP of Rs 1,783, the stock trades at 14x times FY14E EPS of Rs 129, where the stock seems to be fairly priced due to the steep rally in the stock this quarter. We have maintained our estimates for FY13 while slightly increasing FY 14 estimates on new launches, in spite of which we are downgrading the stock to Neutral from BUY with a target of Rs 1,846. (Standalone business valued at Rs 1,807 @14x times FY13E earnings + KTM business value of Rs34 and Indonesia business valued at Rs 5).