Kotak Institutional cuts Bajaj Auto to 'reduce'

Kotak Institutional Equities on Wednesday downgraded Bajaj Auto to "reduce" from "add," saying valuations had reached a historical high and it sees limited re-rating triggers from current levels.

Bajaj Auto on Monday launched the new Discover 100 T motorcycle to take on the likes of Hero MotoCorp 's Splendor, Passion and Honda's Dream Yuga in the 100 cc commuter bike segment, an area where Bajaj Auto has struggled to keep pace with Hero.

But the brokerage doesn't expect the country's second largest two-wheeler maker to gain much given that the competition is increasingly focusing on this segment.

"We believe an increase in market share in the domestic motorcycle segment could be limited as competitors line up more launches in the 100 cc segment," Kotak analysts Hitesh Goel and Vinay Kumar said.

The analysts say Bajaj Auto trades at 16X PE multiple on FY2014 earnings estimates, a historical high and a further re-rating of the stock is unlikely.

"We believe the stock also factors a sharp recovery in exports growth in FY2014 and EBITDA margin expansion of 200 bps due to a weak Rupee," Goel and Kumar added.

They have a target price of Rs 2,100 on the stock.

Bajaj Auto shares were down 0.3 percent at Rs 2,193 on NSE in noon trade on Wednesday. The stock has gained 31 percent so far this financial year.