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UBS Investment Research
Bajaj Auto
S everal headwinds, downgrade to Neutral
�� Event: Domestic pressures rising; Export uncertainty; Higher tax rate
We believe the co. is facing multiple headwinds: 1) Bajaj mktshare in motorcycles
has now dipped to 25% in Q1FY12 from 29% in Q2FY11. The co. will need to
choose between maintaining high margins or arresting market share decline. 2) We
believe demand shift is likely to impact Bajaj negatively – as higher interest rates
and petrol prices will lead to customer shifting to cheaper and more fuel efficient
100cc models. 3) Uncertainty on export growth due to DEPB phase out from
Q2FY12. 4) Higher tax rate from FY13 with expiry of tax breaks at Pantnagar.
�� Impact: SG&A needs to rise; Cutting FY13 EPS on higher tax rate
Co. has managed to sustain high margins with strict control on other expenses and
taking price increases to offset raw material pressure. We believe with slower
growth the competitive environment will become tougher, sales and marketing
spend could significantly outpace vol. growth leading to margin pressure. We
reduce FY13E EPS by 3% as we raise tax rate from 27% to 29%.
�� Action: Downgrade to Neutral on weak earnings growth with margin risk
We estimate 2yr EPS CAGR of 7% over FY11-FY13, with potential risk of further
downgrades. We therefore see limited upside from current levels and downgrade
the stock to Neutral. We remain 5%/8% below consensus for FY12/13 EPS.
�� Valuation: Downgrade Neutral; Reduce PT to Rs1,650 (from Rs1,700)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%. Our
12-mth PT implies stock will trade at 15.8x FY13E earnings
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Bajaj Auto
S everal headwinds, downgrade to Neutral
�� Event: Domestic pressures rising; Export uncertainty; Higher tax rate
We believe the co. is facing multiple headwinds: 1) Bajaj mktshare in motorcycles
has now dipped to 25% in Q1FY12 from 29% in Q2FY11. The co. will need to
choose between maintaining high margins or arresting market share decline. 2) We
believe demand shift is likely to impact Bajaj negatively – as higher interest rates
and petrol prices will lead to customer shifting to cheaper and more fuel efficient
100cc models. 3) Uncertainty on export growth due to DEPB phase out from
Q2FY12. 4) Higher tax rate from FY13 with expiry of tax breaks at Pantnagar.
�� Impact: SG&A needs to rise; Cutting FY13 EPS on higher tax rate
Co. has managed to sustain high margins with strict control on other expenses and
taking price increases to offset raw material pressure. We believe with slower
growth the competitive environment will become tougher, sales and marketing
spend could significantly outpace vol. growth leading to margin pressure. We
reduce FY13E EPS by 3% as we raise tax rate from 27% to 29%.
�� Action: Downgrade to Neutral on weak earnings growth with margin risk
We estimate 2yr EPS CAGR of 7% over FY11-FY13, with potential risk of further
downgrades. We therefore see limited upside from current levels and downgrade
the stock to Neutral. We remain 5%/8% below consensus for FY12/13 EPS.
�� Valuation: Downgrade Neutral; Reduce PT to Rs1,650 (from Rs1,700)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%. Our
12-mth PT implies stock will trade at 15.8x FY13E earnings
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