Buy Bajaj Auto, target Rs 2775: CLSA

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CLSA is bullish on Bajaj Auto and has maintained outperformer rating on the stock with target price of Rs 2775.

 

CLSA research report on Bajaj Auto

 

Bajaj Auto is on the cusp of a sequential improvement in operational and financial performance. Both motorcycle volume growth and quarterly profit growth are likely to turn positive 4QFY08 onwards. Going forward, 1HFY09 will likely see strong volume and profit growth due to low base of 1HFY08. Margins, too, should improve 3Q onwards with 'XCD' volumes picking up. We upgrade our EPS estimates for Bajaj 3% for FY08 to Rs115 and 8% for FY09 to Rs136. Maintain Outperform with a revised target price of Rs2,775.

 

3Q will likely be the last bad quarter for Bajaj

 

Motorcycle volume growth will likely turn positive for Bajaj in 4QFY08 after 3 quarters of negative growth driven by rising volumes of the new bike 'XCD'. Motorcycle despatches will start equalling retail sales Oct onwards as dealer inventories have returned to reasonable levels after Bajaj cut despatches in 1HFY08. Motorcycle growth momentum will likely accelerate as we move into FY09 boosted by the low base of 1HFY08. Strong motorcycle exports growth is also expected to continue. We forecast 15% domestic and 30% exports growth for motorcycles in FY09. 3Ws, however, will likely continue to see lacklustre demand. We forecast just 6% growth in FY09 after an 11% decline in FY08. Quarterly financial performance will likely follow the same trends with 4Q profit growth returning to positive growth territory after 4 quarters of negative growth.

 

Margin improvement on the cards

 

We expect Bajaj Auto's EBITDA margins to see a sequential improvement in 2HFY08 and further into FY09 as volumes of the 'XCD' pick up. Product-mix driven margin improvement could be meaningful as Bajaj currently earns close to zero margins on its 100CC bikes (40% of volumes). Proportion of 100CC bike sales should drop as 'XCD' volumes having margins of about 15% pick-up. We also understand that Bajaj intends to have a greater focus on profitability during this festival season as compared to last year. Our estimates factor in EBITDA margins for Bajaj expanding 80 bps in FY09 to 14.5% (13.7% in FY08).

 

Outperform with a target of Rs2,775

 

We expect Bajaj Auto's stock to outperform the market in coming months as monthly volumes and quarterly performance starts to improve. Timely completion of de-merger related approvals and formalities should also drive stock performance. Our revised target price of Rs2,775 (Rs2,350 previously) also includes an increase of value of stake in Bajaj Allianz Life Insurance to Rs529/sh (Rs443/sh previously) as per our Banking analyst. Key risk to our call is poor market response to the new bike 'XCD' and aggressive pricing action by Hero Honda, which could force Bajaj to follow suit.