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Spark Capital: Bajaj Auto 3QFY13 Results Review: Headwinds ahead in the domestic market; Downgrade to Reduce on expensive valuations




Spark Capital Advisors(India) Private Limited


18 Jan 2013





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Headwinds ahead in the domestic market; Downgrade to Reduce on expensive valuations Bajaj reported a 9.6% yoy growth in revenues driven by a 5% growth in volumes and a 4.5% growth in realisations. EBITDA margins expanded 30bps qoq and came in at 18.7%. Adjusted PAT was 2.4% lower yoy and came in at Rs 8.18bn. We believe near term pressures in the domestic market will continue to affect sales. However, we factor in a growth of 10% in domestic motorcycles in FY14 and 11% in FY15 driven by new launches. In our view, upsides to our domestic growth estimates are unlikely given lack of visibility of a revival in consumer sentiment and heightening competitive intensity. We expect a growth of 11% in domestic three wheelers in FY14 and FY15 factoring in growth from the new permits issued in Jaipur (4,000), Hyderabad (20,000), Maharashtra and Delhi. Management has guided a 15-18% CAGR for export volumes driven by increasing penetration within Africa, entering more LatAm markets and industry growth in Silence, Bangladesh, Philippines etc. In the export markets, Nigeria has largely been the growth driver with other markets being flat or negative yoy. We continue to believe in the long term growth potential of these markets and believe the company’s sales in newer markets would be aided by its alliance with Kawasaki and KTM. However, given the instability caused by terrorist activities in Nigeria, short term blips in volume continues to be a probability. We prefer to factor in a growth of 15% in export volumes in FY14 and FY15. We have not factored in any volumes from the RE60 in both the domestic and export markets. Volumes from this product may therefore present an upside to our estimates. We expect EBITDA margins to expand from 18.7% in 3QFY13 to 19% in FY14 and FY15 on the back of better USDINR realisations. However we don’t factor a complete flow-through of better rupee realizations to margins, as we expect the company to pass some of these benefits to consumers to drive volumes. Valuations and estimates: We expect revenue to grow at 16% CAGR for FY13-15E to Rs. 267bn and expect margins to expand to 19.1% leading to an EBITDA growth of 18% CAGR to Rs. 51.13bn. We expect PAT in FY15 to be Rs 41bn. We roll-forward to FY15 estimates and value the stock at 15x FY15E EPS of Rs 141 and arrive at a TP of Rs 2,113. We downgrade the stock to Reduce (earlier Add) given the steep stock price appreciation and limited upside. Conference call highlights: (1) The company has hedged USD 900mn of exports from a lower band of Rs 53 up to Rs 62 per USD. (2) Inflationary pressures are seen in conversion cost on raw material (5% to 7% of sales).

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