Bajaj Auto (3QFY15) : Decent quarter but headwinds persist. Maintain NEUTRAL :: HDFC Securities

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Decent quarter but headwinds persist
Bajaj Auto’s 3QFY15 adjusted EBITDA of Rs 11.5bn beat
expectations by ~4%. Margins expanded by 30bps QoQ
driven by favorable currency realisations which more
than offset its insipid product mix. However, APAT at Rs
8.06b was lower than expected due to sharp YoY/QoQ
decline in other income.
With three new launches in 4QFY15 – Platina self start
and two Pulsar adventure sport variants, Bajaj hopes to
revive its domestic 2W market share. The Discover
brand continues to struggle with the recently launched
Discover 150cc bike already witnessing a significant
decline in volume run-rate. Per the company, a sharp
depreciation in currency rates for African and LATAM
countries against the USD is likely to cause near term
disruption in export demand in these markets.
We have cut our FY16/FY17 EBITDA estimates by
5%/4% respectively, largely driven by lower volume
growth assumptions. Bajaj’s earnings would now see
lumpiness due to the impact of tax changes on its FMP
investments. We therefore find it appropriate to value
the company on EV/EBITDA basis and assign a target
multiple of 11x on FY17E EBITDA, which is inline with its
past 5 year average. At our TP of Rs 2,614 (earlier Rs
2,648), Bajaj would trade at 14.6x its FY17E core EPS.
 Result summary: Bajaj Auto reported a 10% YoY
increase in topline as both domestic and export ASPs
witnessed healthy improvement. Bajaj’s gross margin
expanded by 70bps QoQ as a weaker product mix was
more than offset by 2% QoQ improvement in USD/INR
rates on its export revenues (now ~50% of total sales).
Adjusted for MTM gains, EBITDA margins were better
than expected at 20.3% (+30bps QoQ). However, with
lower treasury income, APAT came in at Rs 8.06bn (-4%
YoY, -8% QoQ), slightly below expectations.
 Earnings call highlights: (i) Weak demand has led to
a sharp rise in inventory levels for the overall industry.
Bajaj currently operates with 30 days of inventory. (ii)
Bajaj’s distributor has raised vehicle prices by 15% in
Nigeria subsequent to devaluation of the Niara. (iii) The
company has hedged ~60% of its FY16 net exposure at
Rs 63-64 to the dollar. (iv)Bajaj expects 30-40k new
permit issues from Hyderabad/Telangana. Further
permits may be opened up in Delhi and Maharashtra.
(v) Benefits from lower commodity prices should
reflect from 4QFY15 but likely to be partially offset by
the increase in conversion costs at vendors end.

LINK

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010749