Buy Bajaj Auto; target Rs 2198: FinQuest Securities
FinQuest Securities is bullish on Bajaj Auto (BAL) and has recommended buy rating on the stock with a target price of Rs 2,198 in its May 28, 2013 research report.
June 01, 2013 / 17:56 IST
FinQuest Securities' research report Bajaj Auto (BAL)
"Bajaj Auto (BAL) reported not so good set of numbers for Q4FY13. Net sales declined 4.5 percent Y-o-Y to Rs 48.4bn led by volume decline of 3.5 percent Y-o-Y (-13 percent Q-o-Q) to 0.98m units and realizations growth of 6.8 percent Y-o-Y (+0.7 percent Q-o-Q) to Rs 47,400. EBITDA margin based on old Schedule VI declined by 134bps Q-o-Q to ~19.2 percent mostly due to higher marketing spends/subventions to financiers. However, PAT decline was much lower at 1 percent Y-o-Y (-6.5 percent Q-o-Q) to Rs 7.66bn driven by higher other income and lower tax rate.A slew of new launches in the executive commuter and sports segment to up the ante: To strengthen it's positioning in the executive motorcycle segment (largest segment), BAL plans to launch 6 new variants of Discover motorcycle (to be priced ~Rs 40-50,000) in FY14 in the domestic market. It also plans to launch new Pulsars and KTMs to maintain its leadership in the domestic premium motorcycle segment where it commands a 47-48 percent share.Focus on commuter segment could impact ASPs negatively but higher export realizations could offset it partly: BAL plans to launch six Discover variants, four of these will be in the Rs40-50k bracket which could lower the overall ASPs. However, the company has hedged ~$1,200mn for exports (around 70 percent of target exports) at an average dollar rate of Rs54/$ compared to the Rs49-50 /$ realization that BAL received in FY13. About half of this benefit will be passed on to the African export destination markets, in order to support volume growth there and the rest would be used to offset adverse mix in domestic 2Ws.Out takeWe expect 2W volume recovery to be back-ended in FY14, with near term volumes expected to remain weak. This coupled with HMSI's continued expansion on capacity, dealer network and product portfolio would result in sustained pressure on the domestic players. Increasing competitiveness in 2W industry could restrict pricing power for BAL. However, we believe in the >200cc segment it could be difficult for the competition to beat BAL on price. RE60 is expected to be launched in Q4FY14 and with the government clearing the norms for Quadricycles, the company could gain significantly in FY15. New permits for 3Ws in some markets, could help BAL limit the fall in sales. However, growth in dispatches is expected to be limited given higher channel inventory and the need for stock correction in Q1FY14. Industry turnaround now depends on normal monsoon.Demand recovery along with success of its new products would be the key driver for the stock performance. Even though, the new range of Discovers would carry lower ASPs, the new range of Pulsars, KTMs are expected to offset the decline in ASPs. The utilization of Kawasaki's network could provide significant benefit for BAL in penetrating the world's 3rd largest 2W market (Indonesia) whose full benefit is expected to come in FY15. This coupled with higher realization potential from RE60 in FY15 could spring a positive surprise on the earnings front.Management's guidance: The management has guided for exports to grow 10-12 percent in volume terms in FY14 as multiple destination markets continue to be under pressure (BoP crises in Egypt, struggling demand in Sri Lanka) while on the domestic front it didn't give any guidance as it felt the outlook was hazy.BAL has a well diversified product and market mix, with motorcycle and 3Ws in domestic and export markets. It has lined up 6-8 models right from executive commuters to the performance motorcycles to launch a fresh onslaught and gain back the lost market share. We believe BAL has got basic architecture ready with its new range of engines; it only has to now launch differentiated products which appeal a varied customer base. Over the past 6 months the company didn't have any major breakthrough successes as it failed to capitalize on its technology. It launched the Discover 125ST and Discover 100T which were similar in looks while the company didn't launch a faired version of the Pulsar 200NS in a fairing hungry country like India or any ABS equipped versions of the 200NS or the KTM Duke 200. BAL is also not so aggressive on the changes in paint/sticker themes, subtle design changes compared to Heromotocorp (HMC) which the latter has used as a major weapon to hold on to its market share in spite of not matching up to BAL in terms of technology. These were some of the lacunae that BAL could have plugged and prevented the loss of market share. However, we are optimistic that BAL will address most of these product gaps in the new models in FY14. Factoring the above investment arguments we expect BAL to post a 12 percent growth in the topline and 14 percent growth in the bottom line over the next two years and model for FY14E/15E revenue of Rs 222.9bn/251.6bn and EPS of Rs 119/Rs 138 respectively. We believe there is a good scope for positive surprises on the earnings front as we reiterate our Buy rating on the stock and arrive at a price target of Rs 2,198 at 18x FY14 earnings," says FinQuest Securities research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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