Bajaj Auto - "Results slightly below expectations, Downgrade on valuations":: LKP

Results slightly below expectations

Bajaj Auto's Q3 FY13 numbers came in slightly below our expectations at the PAT levels. Net sales including other operating income came in at Rs54.1 bn, which was 8.9% up qoq and 8.6% up yoy. Realizations were up 5.5% yoy and 2.6% qoq to Rs 49,863 which along with a 5% yoy and 7% qoq growth in volumes resulted in inline revenues. Domestic volumes grew by 8% yoy and 14% qoq on the back of a  seasonally good quarter associated with the festive season, while exports declined by 1% yoy and 4% qoq mainly on weak market conditions in Sri Lanka, while markets like Egypt, Iran and Argentina have shown some signs of recovery. At the EBITDA levels, RM costs to net sales dipped to 73.9% from 74.1% qoq, while staff costs declined sequentially as a % of sales from 3.2% to 3%. EBITDA margins were up to 19.1% from 19% qoq , but was lower on a yoy basis from 20.3%, which was again in line with our expectations. Other expenses came in at 6.3% v/s 7.2% of sales in Q2 and 6.6% yoy. However, more than expected tax rates at 30.2% v/s 28.8% qoq and 25.2% yoy due to expiry of tax benefits from Pantnagar from Q1 FY 13 onwards and lower other income pulled the adjusted profits down by 4% yoy, while on qoq basis, the profits were up by 11% to Rs8.18bn as compared to weak preceding quarter and 3% below our expectations.

Outlook and valuation

Bajaj Auto is facing issues in the domestic as well as export markets linked with the weak business environment across the globe. Market trends are signaling for a poor FY 13 and some recovery in FY 14. In India, competition may get arrested somewhat with new launches, however, the broad market remains lackluster. Muted volume growth with uncertainty surrounding excise duty hikes will keep the markets for 2W muted in the ensuing quarters. In exports, SL is dragging the business, while Africa remains taut. Latin America is also witnessing softness as the entire market is growing at a slow pace. Margins may improve of softening of input costs. However, the company looks overvalued at current levels at 16x times FY14E earnings, which we believe is not reasonable. In line with the muted outlook on the sector and considering the recent rally in the stock, we downgrade Bajaj Auto to Underperformer from Neutral, while we maintain our estimates and target price at Rs1,846.

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