Bajaj Auto Strong quarter, but challenging outlook Standard Chartered Research,

Bajaj Auto
Strong quarter, but challenging outlook
 Bajaj Auto‟s (BAL) 1QFY14 earnings at INR 8.1bn were
ahead of our estimates, led by better-than-expected
margins.
 Operating performance was aided by favourable currency
movement in 1QFY14.
 Favourable currency hedges are likely to further improve
margins in subsequent quarters, in our view.
 However, the volume outlook continues to remain
uncertain in both domestic and export markets.
 The stock appears fairly priced at current valuations. We
maintain our In-Line rating with a revised price target of
INR 1,952 (versus INR 1,910 earlier).

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1QFY14 revenue in line with our estimates. Revenue
remained flat q/q at INR 49.6bn and was in line with our
estimates, led by 7% y/y growth in average realisations, even
as volumes declined 9% y/y. Export realisations were up
sharply by 21% q/q, led by favourable currency movement.
Domestic realisations, however, declined 5% q/q due to a poor
mix in favour of economy-segment bikes.
Operating performance boosted by favourable currency.
The operating margin (adjusted for an MTM forex loss of INR
960mn) was 21.3%, ahead of our estimate of 19.8%, led by
better-than-expected export realisation (we had assumed that
BAL would partially pass on the currency benefit to consumers).
This was aided by favourable currency hedges – average USDINR realisation for the quarter was at 57.4 versus 51.6 y/y. As a
result, EBIDTA grew 10% y/y despite a volume decline.
Earnings ahead of our estimates on improved margins.
Other income stood at INR 1.2bn and included dividend income
of INR 270mn from KTM. The average tax rate for the quarter
was steady at 29%. Led by better-than-expected margins, PAT
grew 13% y/y to INR 8.1bn, ahead of our estimate of
INR 7.45bn.
Valuation. While margins seem to be protected by favourable
currency movement, the volume outlook remains uncertain. We
realign our assumptions post 1QFY14 results, lowering our
FY14E volume to -1% growth (+3% earlier) and increasing
margin to 20.5% (20% earlier). Given an uncertain demand
environment, we believe the stock is unlikely to be re-rated. It
appears fairly valued at 13.5x FY15E earnings and 10.8x
EV/EBITDA. We maintain our In-Line rating with a revised price
target of INR 1,952, implying 13x FY15E earnings.