Bajaj Auto share price rallied nearly 2 percent after Morgan Stanley has upgraded the stock to overweight from underweight and also raised target price to Rs 3,251 (from Rs 2,502 earlier), implying 17 percent upside.
"The stock has underperformed BSE Sensex by 10 percent over past year, consensus is negative and we now take a contrarian view and upgrade Bajaj Auto to overweight," it reasons.
The brokerage house says it now applies an 18x FY19 P/E multiple against 15x earlier, to reflect sector rerating, trough earnings and potential for higher dividend yield, as cash to market capitalisation is expected to rise to 21 percent by FY19. It would use any weakness in the stock post Q4FY17 earnings to build positions.
With Eicher Motors' Royal Enfield running at full capacity, Morgan Stanley believes the key upside surprise of premiumisation will be seen at companies like Bajaj Auto where 35 percent of revenues come from more than 125cc bikes and capacity utilisation is low.
The slew of new launches in the premium space should also aid in market share growth, it believes.
Bajaj's export run rate in the past three months is 34 percent lower than its FY15's average, as end markets were hit by commodity downturns and a strong dollar.
The environment remains challenging in Nigeria but Latin America and ASEAN demand should gradually turn as the underlying economies improve, it believes.
For Nigeria, where two wheeler sales have halved since 2015, the currency has started to stabilise, says Morgan Stanley which expects there growth from FY19. The brokerage house has built in 9 percent and 20 percent export growth in FY18 and FY19 for Bajaj Auto.
Meanwhile, the two-wheeler maker has registered a 11 percent degrowth in March sales at 2.72 lakh units year-on-year, dragged by domestic sales that fell 11 percent while exports increased 1 percent.
At 11:06 hours IST, the stock was quoting at Rs 2,802, up Rs 41.30, or 1.50 percent on the BSE.
Posted by Sunil Shankar Matkar
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