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Bajaj Auto (BJAUT)
Automobiles
It’s all in the price. We do not see any upside triggers on the stock from current levels
as valuations are in the fair range and given earnings growth is expected to moderate
(13% CAGR over FY2011-13E), we do not see re-rating potential in the stock.
We maintain our REDUCE rating with a target price of Rs1,462 based on 15X PE on
our FY2012E earnings estimate (10% premium to our Hero Honda’s target multiple).
Domestic motorcycle industry growth to moderate in FY2012E
We expect the domestic two-wheeler industry growth to moderate to 14% yoy in FY2012E from
20% in FY2011E due to increase in petrol prices and interest rates. In the past two years, the twowheeler industry has grown at >20% above the last 5 years’ trend of 12% yoy due to stimulus
given by government, pent-up demand (FY2008 and FY2009 saw no growth in industry volumes)
and rise in government employee salaries due to pay commission reforms. We do not see any of
these factors supporting the two-wheeler growth in FY2012E. We forecast Bajaj Auto’s domestic
motorcycle sales to grow at 13% CAGR over the next two years.
EBITDA margins to decline by 120 bps yoy in FY2012E
We estimate EBITDA margins to decline by 120 bps yoy in FY2012E due to (1) limited pricing
power in the industry will not be able to fully offset rising material cost pressures and (2) moderate
improvement in product mix in FY2012E will not be able to positively impact margins, in our view.
Motorcycle exports growth to moderate to 15% CAGR in FY2011-13E
Bajaj Auto motorcycle exports have grown at 36% CAGR between 2007 and 2011E driven by
market share gains in Africa, Middle East, Sri Lanka and Bangladesh. YTD FY2011 (till Nov) exports
have grown by 38% yoy driven by sharp increase in Sri Lanka, Latin America and African markets.
We expect exports growth to moderate as we believe market share gains from current levels could
be difficult for Bajaj Auto.
Sedate growth expected in three-wheelers
After a strong growth period in FY2009-2011E (21% CAGR) in domestic three-wheeler segment
due to issue of fresh permits by state governments, we believe we could enter a phase of
moderate growth due to (1) high base effect and (2) increase in personal vehicle ownership.
Maintain REDUCE rating on slowing earnings growth
We maintain our REDUCE rating on the stock as we do not see any upside triggers despite
valuations being in a fair range. We expect earnings growth to moderate to 13% CAGR
over FY2011-13E due to (1) our expectations of slower growth in the two-wheeler industry
to 14% yoy in FY2012E from 20% yoy in FY2011E and (2) higher material costs, flat export
realizations, and limited pricing power will lead to a 120 bps yoy decline in EBITDA margins
in FY2012E. Stock trades at 15.2X PE on our FY2012E EPS estimate, currently trading at a
19% discount to Hero Honda which we believe is unjustified. We ascribe a 15X PE multiple
on our FY2012E EPS estimate based on a 10% premium to our Hero Honda’s target multiple
as we reckon is justified due to (1) superior margin profile of Bajaj Auto, (2) lesser business
uncertainty as compared to Hero Honda because of established R&D base and (3) superior
earnings growth of 13% CAGR over FY2011-13E vs Hero Honda’s 10% CAGR over the
same period. Our REDUCE rating reflects our bearish stance on the two-wheeler sector and
we do not see any absolute upside from current levels. From a relative perspective, we prefer
Bajaj Auto to Hero Honda in the two-wheeler sector.
Domestic motorcycle industry growth to moderate in FY2012E
We expect the domestic two-wheeler industry growth to moderate to 14% yoy in FY2012E
from 20% in FY2011E due to increase in petrol prices and interest rates. In the past two
years, two-wheeler industry has grown at >20% above the last 5 years’ trend of 12% yoy
due to stimulus given by government, pent-up demand (FY2008 and FY2009 saw no growth
in industry volumes) and rise in government employee salaries due to pay commission
reforms. However, we do not see any favorable policies by government to boost demand in
the two-wheeler sector over the next two years beyond the normal trend growth rate and
given the higher penetration levels of two-wheelers vs passenger cars, we expect twowheeler growth to be lower than the passenger car growth in FY2012E. We do not expect
any major change in industry structure over the next two years despite split between Hero
Honda and Honda, but we estimate Honda could take some market share from Hero Honda.
We believe Bajaj Auto market share to remain relatively stable over this period and forecast
domestic motorcycle sales to grow at 13% CAGR during FY2011-13E.
EBITDA margins to decline by 120 bps yoy in FY2012E
We expect Bajaj Auto’s EBITDA margins to remain at 20% levels in FY2011E, a decline of
200 bps yoy due to sharp rise in raw material cost pressures. Bajaj’s product mix improved
significantly in FY2011E (>125cc segment bike share improved to 47% of total motorcycles
from 42% in FY2010) but the EBITDA margins declined due to limited pricing power, sharp
rise in raw material prices and cost pressures due to change in emission norms. We estimate
EBITDA margins to decline by 120 bps yoy in FY2012E due to (1) limited pricing power in the
industry will not be able to fully offset rising material cost pressures and (2) moderate
improvement in product mix in FY2012E will not be able to positively impact margins
significantly.
Exports growth to moderate in FY2012E
Bajaj Auto motorcycle exports have grown at 36% CAGR during 2007-2011E driven by
market share gains in Africa, Middle East, Sri Lanka and Bangladesh. YTD FY2011 (till Nov)
exports have grown by 38% yoy driven by sharp increase in Sri Lanka, Latin America and
African markets. We do not see any major risk to Bajaj Auto’s dominance in its respective
markets as Hero Honda will take some time to develop its brand equity and distribution
network in the export markets. We forecast a 15% volume growth in motorcycle exports in
FY2012E. Bajaj Auto has achieved market share of ~15% in its addressable markets and it
will be difficult to increase market share beyond current levels. If Bajaj Auto manages to gain
further market share in Africa, we could see upside risk to our export estimates.
Sedate growth in three-wheelers expected
After a strong growth period in FY2009-2011E (21% CAGR) in domestic three-wheeler
segment due to issue of fresh permits by state governments, we believe we could enter a
phase of moderate growth due to (1) high base effect and (2) increase in personal vehicle
ownership. Bajaj Auto has lost 1.3% in FY2011YTD (till Nov) to Mahindra and TVS Motors.
We forecast Bajaj Auto’s three-wheeler sales to grow at 10% CAGR during FY2011-13E.
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