Bajaj (BJAUT IN, Buy, off Conviction List)
What happened
We maintain our Buy rating on Bajaj Auto and continue to remain positive on
company fundamentals. However, we remove the stock from our conviction
list and replace it with Tata Motors where we see higher relative upside on
account of the strong product cycle at JLR (currently at its inflection point).
Since we placed Bajaj Auto on our conviction list on Feb 15 2012, the stock is
up 14.7% vs. Sensex/BSE Auto Index up 8.8%/10.3% respectively.
Current view
Structurally, we remain positive on the global 2-wheeler space, due to
relatively consolidated nature of the industry, and growing base of consumers
at the bottom of the global economic pyramid. (See India Auto:
Deconstructing the 2-wheeler value creation engine; Buy Bajaj Auto, Feb. 15
2012. However, we cut our FY14E-16E EPS estimates by 9% to 14% on
account of the weak domestic 2-wheeler demand outlook given the backdrop
of continued weak consumer sentiment due to persistently high inflation
(especially CPI) and interest rates in the economy. We now see flattish 2-
wheeler domestic demand growth forecast for FY14 vs. prior assumptions of
11% growth with pick up in FY15/16 to 14%/12%.
We continue to maintain our positive stance on Bajaj Auto and maintain our
Buy rating as we still prefer the relatively more defensive 2-wheeler segment
when compared to rate sensitive pockets like passenger cars and trucks. Bajaj
Auto continues to deliver top quartile CROCI and industry leading EBITDA
margins on account of: 1) premium segment exposure in 2Ws, 2) first mover
advantage in exports, 3) FX benefits on account of INR depreciation as 33% of
its sales (in FY13) is derived from exports, and 4) exposure to higher margin
3-wheeler segment expected to get boost in the near term especially in
domestic markets with sanction of new permits in Hyderabad (~20K) and
Maharashtra (~30K). The stock is also on the GS SUSTAIN Focus List. Our cut
to EPS estimates are driven by sluggish domestic 2W demand but we still
remain positive on export growth outlook both for 2Ws and 3Ws. We raise
our 12-month P/E-based target price by 6% to Rs2,390 from Rs2,260 as we roll
forward to FY15E based target price. We now assign a higher target multiple
of 16.5X vs. prior 16X due to improved export growth and margin outlook as
well as relatively defensive nature of Bajaj Auto’s earnings, in our view.
Risks: 1) Longer-than-expected resolution of ongoing labor strike at Chakan
plant and any potential spill-over to other plants leading to loss of retail sales
and market share, 2) better-than-expected success of competitors such as
Honda and Yamaha, 3) higher raw material costs, 4) lower demand in India or
overseas markets, and 5) lower-than-expected consumer confidence.
��
What happened
We maintain our Buy rating on Bajaj Auto and continue to remain positive on
company fundamentals. However, we remove the stock from our conviction
list and replace it with Tata Motors where we see higher relative upside on
account of the strong product cycle at JLR (currently at its inflection point).
Since we placed Bajaj Auto on our conviction list on Feb 15 2012, the stock is
up 14.7% vs. Sensex/BSE Auto Index up 8.8%/10.3% respectively.
Current view
Structurally, we remain positive on the global 2-wheeler space, due to
relatively consolidated nature of the industry, and growing base of consumers
at the bottom of the global economic pyramid. (See India Auto:
Deconstructing the 2-wheeler value creation engine; Buy Bajaj Auto, Feb. 15
2012. However, we cut our FY14E-16E EPS estimates by 9% to 14% on
account of the weak domestic 2-wheeler demand outlook given the backdrop
of continued weak consumer sentiment due to persistently high inflation
(especially CPI) and interest rates in the economy. We now see flattish 2-
wheeler domestic demand growth forecast for FY14 vs. prior assumptions of
11% growth with pick up in FY15/16 to 14%/12%.
We continue to maintain our positive stance on Bajaj Auto and maintain our
Buy rating as we still prefer the relatively more defensive 2-wheeler segment
when compared to rate sensitive pockets like passenger cars and trucks. Bajaj
Auto continues to deliver top quartile CROCI and industry leading EBITDA
margins on account of: 1) premium segment exposure in 2Ws, 2) first mover
advantage in exports, 3) FX benefits on account of INR depreciation as 33% of
its sales (in FY13) is derived from exports, and 4) exposure to higher margin
3-wheeler segment expected to get boost in the near term especially in
domestic markets with sanction of new permits in Hyderabad (~20K) and
Maharashtra (~30K). The stock is also on the GS SUSTAIN Focus List. Our cut
to EPS estimates are driven by sluggish domestic 2W demand but we still
remain positive on export growth outlook both for 2Ws and 3Ws. We raise
our 12-month P/E-based target price by 6% to Rs2,390 from Rs2,260 as we roll
forward to FY15E based target price. We now assign a higher target multiple
of 16.5X vs. prior 16X due to improved export growth and margin outlook as
well as relatively defensive nature of Bajaj Auto’s earnings, in our view.
Risks: 1) Longer-than-expected resolution of ongoing labor strike at Chakan
plant and any potential spill-over to other plants leading to loss of retail sales
and market share, 2) better-than-expected success of competitors such as
Honda and Yamaha, 3) higher raw material costs, 4) lower demand in India or
overseas markets, and 5) lower-than-expected consumer confidence.
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