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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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