Bajaj Auto 1QFY12 Review: EBITDA margin disappoints ::JPMorgan

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Bajaj Auto
Neutral
BAJA.BO, BJAUT IN
1QFY12 Review: EBITDA margin disappoints,
management expects sales growth to be driven by
exports


 1QFY12  Results  highlights:  The  company  reported  1Q  PAT  at  Rs.7.1B
(+20%  yoy),  which  was  broadly  in line  with  our  estimates  (but  below
consensus). The EBITDA margin came in lower than our estimates though at
19.1%  (-140bp  qoq).  This  was  offset  by lower tax  rates,  which  came in  at
25.4% (-320bp yoy).
 Revenues:  Bajaj Auto  has  reported  unit  sales  growth  of  18%  yoy  - led  by
strong  growth  in  exports  (+32%  yoy),  while  domestic  segment  growth  has
moderated to 10% yoy. Thus, while the blended market share in motorcycles
has  held  up  at  32.7%,  the  OEM  has  ceded  c.200bp  share  in  the  domestic
market. Product realizations have declined by -1% qoq, given growing share
of  the  executive  segment  ‘Discover’  bikes  in  the  product  mix.  EBITDA
margins:  1Q  margin  at  19.1%  (-140bp  qoq) was below  our  estimates.  The
variance  was led  by  higher  raw  material  cost  ratio  at  72.6%  (+170bp  qoq)
given  higher  commodity  prices and  change  in  product  mix.  Other  income
was 10% lower yoy as  the  company  is  awaiting  VAT  refund  from  the
Maharashtra government.
 Management  guidance:  They  expect revenue  growth to  come in  at  c.20%
yoy  for FY12E - driven by exports while the local sales growth is likely to
moderate.  The  OEM  will  be  launching  the  new  Boxer  ‘150cc’bike  in  the
current  quarter.  The  margins  are  likely  to  remain  range  bound  at  current
levels.  The  government  will  likely  revise the  DEPB incentives  scheme  for
exports in 2QFY12E.
 Valuation  and  Target  Price: While  our earnings  estimates  are  unchanged,
we are rolling  forward our target price to Mar 12E and set a revised price of
Rs.1,490. We continue to value the OEM on 13x forward PE multiple (in line
with  the  earlier  methodology).  We  re-iterate  our  Neutral  rating on  the
company  given  that  while  exports  will  drive  growth  for  Bajaj,  domestic
industry  growth  rates  are  likely  to  moderate  from  hereon and  the  OEM  is
ceding  share  to  Hero  Honda.  Key  risks:  on  the  downside:  Any  adverse
change  in  the  DEPB  rates,  on  the  upside:  stronger  than  expected  industry
growth.