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In-line quarter; good run to continue
We increase our earnings estimates and raise the target price for Bajaj Auto
(BJAUT) post Q2FY11 results conference call with the management on account
of (a) higher export growth expectation in FY11 and FY12 (20% vs 15% earlier)
(b) higher realisation on account of recent price hike and better than expected
product mix (3w/Pulsar/Discover150cc) (c) higher yield on the investment book
as per management guidance and (d) rolling forward our one year target price
to Sep ‘12 earnings. Our Sep ‘11 target price now stands at Rs 1,650 based on
15x Sep ‘12 earnings, leaving an upside potential of ~11%. We maintain our
HOLD recommendation on Bajaj Auto and also maintain that it is the best play
on the two-wheeler sector.
Exports – a possible game changer? YTD growth in exports for Bajaj Auto has
been higher than our initial estimates. Management suggests that the strong
volume/growth momentum for exports in key geographies (YTD: Sri Lanka
↑150%, S.E. Asia ↑ 24%, Africa ↑ 35%, Latam ↑ 94%) is expected to sustain
going forward. The company continues to explore newer geographies which
could further boost export volumes. We have increased our volume estimates for
motorcycle exports (30% of total motorcycle sales) for FY12 from 15% to 20%.
Better than anticipated product mix and higher price increases: The product
mix for Bajaj Auto has been better than anticipated with Discover 150cc selling
35,000 units p.m. and sales of Pulsar 135cc limited to just 10,000-12,00 units
p.m.. The recent capacity increase in the three-wheeler space, which is
witnessing strong demand in both the domestic and exports market, would
further aid in improving average realisations for the company. Also, following a
price increase of 1-2% in June-end, the company further increased prices for its
entire product line by 2% on Oct 1st.
Maintain HOLD with a target price of Rs 1,650; TP rolled forward to Sep ’11:
With expectation of higher exports, higher realisations, higher yield on
investment book and rolling forward our target price to Sep ’11, we raise our
target price to Rs 1,650 from Rs 1,425 earlier. At our target price the stock still
provides an upside potential of 11%, we therefore maintain our HOLD
recommendation. We continue to maintain Bajaj Auto as our preferred pick in
the two-wheeler space. The stock is currently trading at 16.1x FY11E and 14.3x
FY12E earnings. At our target price, the stock will trade at 15x Sep ’12 earnings.
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