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24 October 2011 2QFY12 Results Update | Sector: Automobiles

Bajaj Auto
BSE SENSEX S&P CNX

16,939 Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel.Perf.(%) M.Cap. (INR b) M.Cap. (USD b)

5,098 BJAUT IN 289.4 1,703/1,190 5/29/30 489.5 9.8

CMP: INR1,692

TP: INR1,860

Buy

Bajaj Auto 2QFY12 results are above estimates, with EBITDA margins at 20.1% (est 19.4%) and adj PAT at INR7.9b (v/s est INR7.6b). Key highlights: Volumes grew by 16.3% YoY (6.5% QoQ) to 1.16m units. Realizations up 4.3% YoY (~3.5% QoQ) to INR45,246/unit (v/s est INR43,834) driven by improvement in product mix. Net revenues grew by 21.3% to INR52.7b (v/s INR51b). EBITDA margin improved by 100bp QoQ (~60bp YoY decline) to 20.1% (v/s est 19.4%), benefiting from lower than estimated RM cost (-120bp QoQ, +70bp YoY). Lower than estimated other income, higher depreciation and interest restricted adj PAT to INR7.9b It reported MTM Fx loss of INR954m (~INR640m post-tax) on its outstanding hedges. The management indicated 2HFY12 EBITDA margins to be better than 2QFY12 margins, driven by a) benefit of weak INR, b) full benefit of higher export incentives and export price increase and c) full benefit of domestic price increase. We upgrade our estimates by ~7% to INR108.7 for FY12 and ~3% to INR124.0 for FY13 to model a) robust volumes, b) higher domestic as well as export realizations on account of price hike taken, weak INR and higher export incentive and c) lower tax in FY12, however we increase our tax assumption for FY13 as we factor in for only 30% tax exemption at Pantnagar. The stock is valued at 15.6x FY12E EPS of INR108.5 and 13.6x FY13E EPS of INR124. Maintain Buy with target price of INR1,860 (15x FY13E EPS).

Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416 Mansi Varma (Mansi.Varma@MotilalOswal.com) + 91 22 3982 5418

Bajaj Auto

Strong volumes coupled with better product and market mix drive revenues Net revenues grew 21.3% YoY to INR52.7b (v/s est INR51b), driven by both strong volume growth and improvement in product mix. Volumes grew 16.3% YoY (6.5% QoQ) to 1,164,137 units, led by 16.3% YoY growth in motorcycles and 16.8% YoY growth in 3-Wheelers. Domestic volumes were up 7% YoY (11% QoQ), driven by 8% YoY (10% QoQ) growth in motorcycles. The premium motorcycle segment (above 125cc) grew by 14% YoY while <125cc segment grew by just 1.6% YoY. Exports volumes at 342,686 units grew 36% YoY (~1% QoQ). In 2QFY12, Bajaj gained market share in domestic motorcycles by 150bp QoQ (180bp YoY) to 26.8%. Pulsar recorded average volume of 86,000 units/month while Discover averaged 133,000 units/month. Realizations improved 3.5% QoQ (4.3% YoY growth) to INR45,246/unit reflecting better product mix (higher share of >125cc segment) and sequentially lower exports (36% of volumes v/s 39% QoQ). It maintained its volume guidance of 4.5m units (~16% growth) for FY12 and expects exports to cross 1.5m units. It anticipates the industry to clock a growth of 14% in FY12. It expects exit domestic market share in Mar-12 to be closer to 30%, as against ~27% in 2QFY12.
Trend in product mix (units)
2QFY12 Motorcycles Domestic Exports Total Motorcycles % of total Three Wheelers Domestic Exports Total 3Ws % of total Total Volumes 684,671 342,686 1,027,357 88.3 55,332 81,448 136,780 11.7 1,164,137 2QFY11 632,672 250,822 883,494 88.3 60,566 56,510 117,076 11.7 1,000,570 YOY (%) 8.2 36.6 16.3 1QFY12 623,175 339,876 963,051 88.1 QOQ (%) 9.9 0.8 6.7

-8.6 44.1 16.8 16.3

42,276 30.9 87,488 -6.9 129,764 5.4 11.9 1,092,815 6.5 Source: Company/MOSL

Trend in market share (%)


2QFY12 75cc - 125cc 125cc - 250cc Dom. Motorcycles Motorcycles (incl Exports) Total Dom. 2W Total 2W (incl exports) Dom. 3W 3W (incl exports) 16.3 51.2 26.8 33.7 20.0 26.2 39.9 58.3 2QFY11 18.2 53.9 28.5 34.2 21.8 27.0 42.1 56.0 YOY (BP) -190 -270 -180 -50 -180 -80 -220 220 1QFY12 QOQ (BP) 16.9 -60 48.7 260 25.3 150 32.7 100 19.4 50 26.1 10 38.3 160 61.0 -280 Source: SIAM/MOSL

Higher realizations and RM cost savings leads to margin expansion EBITDA margin improved by 100bp QoQ (~60bp YoY decline) to 20.1% (v/s est 19.4%) led by higher realizations and 120bp QoQ savings (+70bp YoY) in RM cost at 71.4%. The reduction in RM cost is a reflection of product mix improvement and higher export realizations.
24 October 2011

Bajaj Auto

EBITDA grew 18% YoY (16% QoQ) to INR10.6b (v/s est INR9.9b). However, lower other income, higher depreciation and interest restricted adj PAT to INR7.9b (+16% YoY, 11% QoQ). Interest cost included a one-off expense of INR200m, while depreciation included a non-recurring expense of INR90m on account of certain imported asset. It reported MTM Fx loss of INR954m (~INR640m post-tax) on its outstanding hedges, translating into reported PAT of INR7.3b. The company has received notice from the Excise department for payment of National Calamity Contingent Duty (NCCD) for Pantnagar plant of INR103m for 1QFY12 and INR676m for prior-period. It has challenged it in the court and hence has not yet provided for the same. If provided, impact on 2QFY12 EBITDA margins would be ~20bp.
Better segment and market mix led to higher realizations

44,116

44,341

42,779

42,595

42,701

42,042

42,024

1Q

37,736

2Q

39,360

3Q

4Q

1Q

2Q

3Q

40,725

4Q

1Q

41,904

2Q

43,393

3Q

4Q

1Q

43,715

2Q

FY09

FY10

FY11

FY12

This coupled with lower RM cost led to higher margins


Raw Material (INR/unit) 74.6 75.5 72.3 68.8 66.2 30,813 29,709 29,417 66.2 68.5 69.3 71.2 70.7 71.4 70.9 72.6 71.4 32,312 2Q FY12
20.1 10,574 2Q

As % to Sales

31,500

28,148

28,249

27,844

1Q

2Q

3Q

4Q

1Q

2Q

3Q

27,887

4Q

29,105

1Q

29,819

2Q

30,694

3Q

4Q

31,428

1Q

FY09

FY10

FY11

Trend in EBITDA and EBITDA margin


EBITDA (INR m) 19.5 12.7 2,960 13.6 3,439 14.5 15.2 8,972 8,493 7,771 6,365 7,235 7,769 8,615 9,108 1Q FY12
Source: Company/MOSL 24 October 2011

EBITDA Margins (%) 22.9 22.0 22.0

20.0

20.7

20.3

20.5

19.1

3,058

2,858

1Q

2Q

3Q

4Q

1Q

4,554

2Q

3Q

4Q

1Q

2Q

3Q

4Q

FY09

FY10

FY11

31,720

45,246

Bajaj Auto

Price increases coupled with weak INR to result in further margin improvement in 2HFY12 It has increased prices in domestic market by INR500/unit for 2W and INR1,0002,000/unit for select 3Ws w.e.f Oct-11. Also, it has increased prices in export markets across products and markets by 3.5% w.e.f Oct-11. The management indicated 2HFY12 EBITDA margins to be better than 2QFY12 margins, driven by a) benefit of weak INR, b) full benefit of higher export incentives and export price increase and c) full benefit of domestic price increase. It does not expect to benefit from softening in commodity prices in 3QFY12 as it has not received any benefit of lower rates in quarterly contracts for steel and monthly contracts for aluminum. ~90% of FY13 exports hedged at a lower band of INR47 Exports for FY12 are totally hedged and ~90% of FY13 exports are hedged. Forex hedge is mixture of forward and range-forward contracts with minimum realization of INR47/USD and maximum of INR51. However, it has not disclosed break-up between plain vanilla forwards and range-forwards. The management indicated that its export profitability would be maintained at INR47/ USD. Additional export incentives to drive profitability Under new Foreign Trade Policy 2009-14, it would be eligible for additional 1% duty credit under Special Focus Market Scheme, which is over and above 3% credit under current Focus Market scheme. It is eligible to receive the additional 1% duty credit under Special Focus Market Scheme in all market except for Bangladesh, Sri Lanka and Philippines. Additionally, it will also benefit from 1% duty credit under Special Bonus Benefit Scheme (w.ef Oct-11 to Mar-12). As a result, overall gross benefit to increase to 10.5% for 2HFY12 and 9.5% thereafter. These additional incentives would boost profitability, since price increase of 3.5% in exports was to off-set reduction in DEPB benefit. Other takeaways The company anticipates volume growth to remain strong in 2HFY12. The company indicated that production at Pantnagar in Oct-11 was impacted due to law & order situation, resulting in loss of ~20,000 units. This, coupled with lesser working days, would further impact production in the current month. Boxer 150cc is currently doing volumes of ~10,000/month, as production was impacted due to curfew in Pantnagar plant. It is aiming for volumes of ~20,000 units from Boxer. Tax rate is expected to increase from FY13 onwards, as first 5 year window of 100% income tax exemption is exhausted. It will now enjoy 30% tax exemption for next 5 years. It has received VAT refund of INR8.6b for FY11 in Aug-11. It expects to receive further INR2.4b for 1QFY12 in Oct-11 and INR2.9b for 2QFY12 by Dec-11. As of Sep-11, it had cash & cash equivalent of INR45.2b.
24 October 2011

Bajaj Auto

Upgrading estimates We are upgrading our estimates by ~7% to INR108.5 for FY12 and ~3% to INR124 for FY13 to model a) robust volumes, b) higher domestic as well as export realizations on account of price hike taken, weak INR and higher export incentive and c) lower tax in FY12, however we increase our tax assumption for FY13 as we factor in for only 30% tax exemption at Pantnagar.
Revised forecast (INR m)
Rev Volumes (units) Net Sales EBITDA Margins (%) Net Profit EPS (INR) 4,515,035 201,723 19.9 31,390 108.5 FY12E Old 4,395,791 194,375 19.3 29,446 101.8 Chg (%) 2.7 3.8 60 6.6 6.6 Rev 5,243,316 238,196 20.1 35,885 124.0 FY13E Old Chg (%)

5,095,629 2.9 228,524 4.2 19.4 80 34,912 2.9 120.6 2.8 Source: MOSL

Valuation and view Continuance of strong volume momentum in domestic market and further in-roads in exports coupled would be key drivers for the stock. The stock is trading at 15.6x FY12E EPS of INR108.5 and 13.6x FY13E EPS of INR124. Maintain Buy with target price of INR1,860 (15x FY13E EPS).

24 October 2011

Bajaj Auto

Bajaj Auto: an investment profile


Company background Bajaj Auto, the flagship of the Bajaj group, is a leading manufacturer of two and three wheelers. The company is a market leader in three wheelers and is 2nd largest player in motorcycles. The company has product offering across all segments of motorcycles, with brands like Discover, Pulsar, Platina, XCD etc, and enjoys leadership in premium segment. Key investment arguments Renewed strategy with focus on Discover and Pulsar two of its most profitable brands Largest exporter of two-wheelers (~63.7% of exports) and three-wheelers (~95% of exports), with scope to drive overall volume growth Ramp-up at Pantnagar, alongwith improvement in product mix, can support margins Key investments risks Strengthening-up of commodity prices coupled with increase in other expenditure to put pressure on margins. Increasing competitiveness in two-wheeler industry could restrict pricing power.
Comparative valuations
Bajaj Auto P/E (x) EPS Gr (%) RoE (%) EV/EBITDA (x) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E 15.6 13.6 20.0 14.3 54.9 48.0 10.6 8.5 Hero MotoCorp 17.1 13.8 20.4 24.3 60.9 55.1 10.6 8.1 FY12 FY13

Recent developments The government has replaced DEBP scheme with Duty Drawback Scheme, with revised rates of 5.5% as against 9% earlier. Valuation and view The stock is trading at 15.6x FY12E EPS of INR108.5 and 13.6x FY13E EPS of INR124. Maintain Buy with target price of INR1,860 (15x FY13E EPS). Sector view Demand drivers in place, driven by increasing penetration in rural markets and replacement demand from urban markets Despite large number of players market share remains concentrated amongst the top two. Industry dynamics favorable, with focus on profitability rather than market share.

EPS: MOSL forecast v/s Consensus (INR)


MOSL Forecast 108.5 124.0 Consensus Forecast 100.7 108.2 Variation (%) 7.8 14.6

Target Price and Recommendation


Current Price (INR) 1,692 Target Price (INR) 1,860 Upside (%) 9.9 Reco. Buy

Stock performance (1 year)


Bajaj Auto 1,800 Sensex - Rebased

Shareholding Pattern (%)


Sep-11 Promoter Domestic Inst Foreign Others 50.0 8.3 16.4 25.2 Jun-11 50.0 8.1 16.3 25.6 Sep-10 49.7 5.1 18.9 26.3

1,600 1,400 1,200 1,000 Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

24 October 2011

Bajaj Auto

Financials and Valuation

24 October 2011

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