Bajaj Auto – BUY: Smooth ride continues:: IIFL

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Smooth ride continues
Bajaj Auto’s operational performance for 2QFY11 was in line with our estimate, with an EBITDA
of Rs9bn (margins at 20.7%); reported PAT at Rs6.8bn was marginally higher than expected on
higher other income. With strong momentum in the two-wheeler industry and particularly, with
Bajaj’s two key brands gaining increased traction, we expect its volumes to grow at >15% in FY12.
The recent price hike (taken from 1 October) gives us comfort that the company can pass on any
increases in commodity prices. This coupled with low advertising spend would help the company
maintain margins. We retain BUY with a target price of Rs1,735 (16x 1-year-forward earnings).
2QFY11 margins in line with expectation, should sustain at current levels: Bajaj Auto’s EBITDA
margin, at 20.7%, was in-line with our expectation, as margins improved QoQ on account of change in
product mix towards three-wheelers and the full impact of a 2% price hike taken in June. The company has
increased prices of motorcycles by an average of Rs650/bike (price hikes range from Rs500/bike to
Rs850/bike) and three-wheelers by Rs1,500/vehicle from 1 October. This should help maintain margins at
20% levels in spite of a recent hardening in commodity prices. The company has hedged its 2HFY11 exports,
70% of FY12 exports, at Rs46.5/US$, and hence, the rupee is currently not a big concern.
Likely to achieve 4m vehicle target, could benefit if there is a change in guard at Hero Honda: The
company is likely to exceed its guidance of 4m vehicles, with exports doing better than anticipated (likely to
end the year at 1.3m vehicles). Media reports indicate that Honda is likely to exit Hero Honda and focus on
its fully-owned subsidiary, HMSI. In the medium term, this would increase competition in the two-wheeler
space, as HMSI is likely to emerge as a stronger player in the sector. However, we reckon Bajaj Auto could
be a beneficiary in the short term, as Honda would need some time to ramp up its distribution network
(currently restricted largely to urban areas). The Hero Group would take time to scale up its R&D efforts and
badly needs a new product to prevent market-share losses.