Bajaj Auto’s Q4 FY13 : LKP Research

Subdued Q4 results, margins weaken further

Bajaj Auto’s Q4 FY13 numbers came in slightly above our expectations at the PAT levels owing to an unexpected rise in other income and a lower than expected tax rate.  However, the topline (net sales including other operating income) came in at Rs47.5 bn, which was in line with our expectations. This was just 2% up yoy, while it was a decline of 12.3% qoq. Realizations were up 7.1% yoy and just 0.6% qoq to Rs 50,167 as the company took a price hike upto Rs 500 per vehicle in April and withdrawal of subventions. Domestic volumes were down by 8% yoy and 18% qoq on the back of competition and weak business environment, which resulted into lower sales in Q4, while exports grew by 5% yoy and fell by 3% 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 73.3% from 73.9% qoq and 73.4% you, while staff costs scaled up to 3.6% of sales qoq and 2.6% yoy. Other expenses to sales zoomed up to 7.7% from 6.3% qoq and 7.1% yoy. This signifies 2W companies (both Hero and TVS spent heavily on this expense head this quarter) investing heavily into marketing now, so as to gain back their lost market shares to competition. As a result of this, EBITDA margins as a result moved down to 17.6% from 18.7% qoq , and 19.8% yoy. Other income grew by 20% qoq and 74% yoy to Rs 2.4 bn. Also, lower than expected tax rate at 25.9% (due to Rs69 cr of tax exemption) compared to 30.2% qoq led to higher than expected PAT at Rs7.65 bn.

Outlook and valuation

Bajaj’s domestic sales may improve with the new launches, but may not help it significantly to gain market share as the executive segment is too crowded and this may lead to a price war, thus hurting domestic 2W margins. With continuation of a weak operational domestic environment, we expect a subdued performance from motorcycles going forward. With strong demand for diesel carrier segment in domestic 3Ws, upgrading of 3W models in Q2 FY14 and expected opening up of permits in some states, 3W business is expected to perform strongly. Exports markets other than Africa and Latin America will remain soft. Higher spend on other expenses to push the inventory as well as fresh sales will restrict margins below the company guidance of 20%. RM costs softening and currency benefits may help Bajaj to improve margins marginally. Also strengthening 3W business with expected (but delayed) launch of the much awaited RE60 in Q4 FY14 will provide some traction to margins. With subdued expectations of volumes from domestic motorcycle segment, we are lowering our FY14/15E volume growth expectations from 6%/9% to 5%/8% in FY14/15E respectively. We have lowered our margin estimates from 20%/20.7% to 18.9%/19.6% for FY 14/15E respectively. We have rolled over our estimates from FY14E to FY 15E. Due to this, our target price moves up from Rs 1,846 to Rs 1,932. Hence, we upgrade the stock from Underperformer to Neutral.

LKP Research

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