26 October 2010

Bajaj Auto:: From Strength to Strength:: Nomura

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􀁾 Action
BJAUT is estimated to grow its volumes by 38% in FY11F, driven by recovery in
Urban India, an improved product portfolio and strong export volume growth. Our
earnings estimates are 12.6% ahead of Bloomberg consensus for FY12F and we
expect upgrades as volumes come through. We maintain a BUY with a price target
of INR1,810, up from INR1,442.
􀁡Catalysts
Strong volume growth, improved domestic market share, low competition from Hero
Honda in case of the Hero Honda JV breaking up.
Anchor themes
BJAUT is likely to benefit from: 1) Revival in the Urban market driven by an
improved job outlook and salary hikes; 2) Global recovery leading to improved
export volumes, and; 3) Improved penetration of export markets.


From Strength to Strength
􀁣 Well on track to meet our estimates
Bajaj Auto lifted its domestic motorcycle market share to 30% in
September 2010 from 27% in September 2009, mostly from profitable
Executive and Premium segments. The company has also been
growing three-wheeler sales at 46% and exports at 57%. With current
SAAR at 3.83mn units for FY11F, the company is nearly on track to
meet our volume estimates of 3.93mn for FY11F.
􀁤 Margins won’t decline much, in our view
Bajaj Auto reported 20.7% margins in 1Q FY11. Had it not been for
one-off cost items (explained later in the note) reported margins would
have been 21.2%. We believe that given the strength of the product
portfolio, operating leverage and 70% of exports hedged at
INR46.5:US$1, margins will stay around 19.7% in FY12F.
􀁥 High multiples sustainable
Bajaj Auto’s P/E multiple has improved consistently in comparison to
the Sensex. The company listed at a discount of 46% to the Sensex
in August 2008; the gap is 5% now. We believe that the company can
sustain a multiple of 15.9x rolling one-year forward earnings as ROEs
have risen to 70% in FY11F from 37% in FY09. Also, its product
portfolio has improved towards high-margin products, all of which are
on a high-growth path.
􀁦 Ahead of consensus by 12.6% for FY12F
Our FY12F estimates are ahead of Bloomberg consensus by 12.6%.
driven by a 8.7% difference in the top line. We believe that as
stronger-than-expected volume growth comes through, consensus will
upgrade. We have revised our DCF-based price target by 16% to
INR1,810, which implies 21.7% upside.

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