Hold Bajaj Auto; target Rs 2000: Emkay

Emkay's report on Bajaj Auto

• Bajaj Auto, management of the company believes that signs of recovery remain elusive, and high inflation, interest rates and prevailing uncertainty impacted both rural and urban demand.
• Demand in the premium segment particularly impacted, but launches of Discover 125ST/100T, Pulsar 200 NS and products off KTM platform to help maintain leadership.
• Market leader in 12 countries out of the 57 export destinations; alliance with Kawasaki and KTM to enhance global presence.

In FY13, three-wheeler sales increased 4.9 percent YoY, driven largely by growth in the diesel segment, which grew by 25 percent YoY as against an industry growth of 9 percent. The company successfully introduced Discover 125 ST and the Pulsar 200 NS across Latin America, Asia, besides introducing a 150cc version of Boxer in East Africa and Egypt, which was well received. Notably, it was able to gain share from Chinese brands in Nigeria. FY13 three-wheeler exports were significantly impacted by higher import tariffs in Sri Lanka and the BOP crisis in Egypt, while motorcycles declined marginally. The company has further invested €33.9mn (Rs2.3bn) in KTM AG and has increased its stake from 40.87 percent to 47.96 percent in FY13. The total investment in KTM AG till date stands at €197.9mn. CY12 revenue/PAT for KTM stood at €612mn/€25.3mn – the company declared a dividend of €0.7 per share in 2012 (Bajaj to receive €3.64 mn). Bajaj produced 26,805 units of KTM Duke Motorcycles in 2012. Performance in Indonesian subsidiary remains lackluster: it sold 11,198 bikes FY13 (YoY decline of 52 percent vs. 11.5 percent for Indonesia’s two-wheeler industry – restriction of financing norms by the central bank impacted the industry). The total investment in the subsidiary stood at Rs1.38bn in end-FY13 post an impairment of Rs 355mn. At the PBT level, the loss for FY13 widened to Rs240mn as against a loss of Rs120mn in FY12. Going forward, its new distribution agreement with Kawasaki Motors is expected to provide a fillip to volumes from H2 FY14. Cash-flow from Operations declined 28 percent YoY to Rs21.3bn, despite only a 2 percent drop in EBITDA, as working capital requirement jumped by Rs5bn - unrealized VAT refund from the government of Rs11bn (vs. Rs8bn YoY) impacted WC levels. Free cash flow declined 44 percent YoY to Rs15.9bn, driven mainly by high capital expenditure of Rs5.5bn – Rs2.6bn was utilized to fund the aircraft purchase and the rest to expand the capacity at Waluj. R&D expenditure increased 53 percent YoY to Rs2.4bn to 1.2 percent of revenues (vs. 0.8 percent YoY). New product refreshes (Discover 125 ST, Discover 100T, Pulsar 200 NS and Duke 125-200), introduction of twin-spark technology for the Pulsar family and higher investments in design, analysis, etc. led to higher R&D spend. As of end-March, the company entered into a range forward contracts for hedging USD904mn of its export receivables for FY14 (we estimate USD1.5bn of total exports). Export Incentives declined 26 percent YoY on lower DEPB benefits (6.4 percent of exports vs. 8.7 percent in FY12) Surplus cash and cash equivalent stood at Rs57.7bn (Rs 200/share). In FY13, other income included valuation gain on hedging instruments – Rs1.32bn and Rs0.69bn gain on repayment of sales tax deferral loan; unlikely to repeat in FY14. Contingent liabilities on tax dispute have reported a sharp 61 percent jump to Rs2.9bn. "We have a "Hold" rating on the stock with a target price of Rs 2,000," says Emkay Global Financial Services research report.
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