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Bajaj Auto Ltd.
Consumption Play with
Valuation Support, Move to OW
What's Changed
Rating Equal-weight to Overweight
Price Target Rs1,567.00 to Rs1,674.00
F12/F13 EPS -1%/+3%
We upgrade to OW: Our recent AlphaWise survey of
corporates points to strong wage growth, which
should benefit consumption; also, the uncertain
macro backdrop makes Bajaj more attractive, given
its better visibility and high quality of earnings. Our
new price target of Rs1,674 suggests 16% upside.
We like Bajaj as:
• The two-wheeler market is more resilient in a slower
environment, as financing dependency is low, and
almost 50% of demand is for replacement purposes.
• Our two-wheeler cost index is down 7% on current
prices against the F1Q12 average price, implying a
50bps cushion to margins that should materialize in
F2H12. We think this gross margin uplift could offset
rising sales promotion costs as demand moderates.
Overall, we expect operating margins will remain
around 19%.
• The Duty Entitlement Passbook (DEPB) incentive
withdrawal is an overhang on the stock. But, we think
an appreciating RMB will improve competitiveness of
exporters, such as Bajaj, and allow them to offset the
adverse impact of the incentive withdrawal. We also
cannot rule out the government extending DEPB in the
face of a slower macro environment.
Valuation Bajaj trades at 13x F13e EPS vs. HH at 16x.
Our DCF-based TP of Rs1,674 implies around 15x FY13e,
which we think is justified given better earnings visibility
and a strong balance sheet. AlphaWise evidence also
supports our positive view: See India Corporate Survey,
dated August 19, by our strategy team.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Auto Ltd.
Consumption Play with
Valuation Support, Move to OW
What's Changed
Rating Equal-weight to Overweight
Price Target Rs1,567.00 to Rs1,674.00
F12/F13 EPS -1%/+3%
We upgrade to OW: Our recent AlphaWise survey of
corporates points to strong wage growth, which
should benefit consumption; also, the uncertain
macro backdrop makes Bajaj more attractive, given
its better visibility and high quality of earnings. Our
new price target of Rs1,674 suggests 16% upside.
We like Bajaj as:
• The two-wheeler market is more resilient in a slower
environment, as financing dependency is low, and
almost 50% of demand is for replacement purposes.
• Our two-wheeler cost index is down 7% on current
prices against the F1Q12 average price, implying a
50bps cushion to margins that should materialize in
F2H12. We think this gross margin uplift could offset
rising sales promotion costs as demand moderates.
Overall, we expect operating margins will remain
around 19%.
• The Duty Entitlement Passbook (DEPB) incentive
withdrawal is an overhang on the stock. But, we think
an appreciating RMB will improve competitiveness of
exporters, such as Bajaj, and allow them to offset the
adverse impact of the incentive withdrawal. We also
cannot rule out the government extending DEPB in the
face of a slower macro environment.
Valuation Bajaj trades at 13x F13e EPS vs. HH at 16x.
Our DCF-based TP of Rs1,674 implies around 15x FY13e,
which we think is justified given better earnings visibility
and a strong balance sheet. AlphaWise evidence also
supports our positive view: See India Corporate Survey,
dated August 19, by our strategy team.
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