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Spark Capital: Bajaj Auto 2QFY14 - Export momentum priced in; Domestic volume outlook remains soft




Spark Capital Advisors(India) Private Limited


18 Oct 2013





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Export momentum priced in; Domestic volume outlook remains soft. Bajaj Auto’s revenues grew 4% yoy with increasing realizations offsetting a volume decline of 8%. The domestic product mix was substantially stronger qoq – Pulsar share up 12ppt qoq three wheeler (3W) share up 2.3ppt. The richer mix reflected in domestic realizations (up 10% qoq) as well as EBITDA margins (up 340bps qoq). We expect the product mix to moderate going forward and expect a sequential dip in margins. Maintain Reduce. Management commentary indicated a 2-3% growth in the festive season. New product launches in the Discover brand are expected to improve volumes for Bajaj in the executive segment. The company targets stabilizing volumes of the Discover portfolio at ~110,000 units/ month from January ‘14. In the domestic market, we expect a volume decline of 4% in FY14 (vs. 12% decline in 1HFY14) and a growth of 13% in FY15 for motorcycles. Growth in exports recovered during the quarter with the African market continuing to be the key driver. Nigeria volumes have moved to a run-rate of ~40,000 units a month from ~35,000 in 1QFY14. Volumes in Egypt remained weak on constraints in obtaining letters of credit for importers although underlying demand remains strong. The company expects this issue to be resolved soon and indicated a return to steady state volumes of ~7,000 units of 3Ws and ~6,500 units of motorcycles a month. We factor in flat export volumes for the year and a growth of 12% in FY15. In 3Ws, management expects ~50,000 permits to open up in Maharashtra, although the timing of sales from these is not known. We expect the product mix to normalize from the next quarter and result in a moderation in margins. With shipments of the new Discover variants commencing, we expect the proportion of this brand to inch-up to 44% of domestic volumes vs. 38% in 2QFY14. Given that Discover averaged 48% of domestic volumes in FY13, we see a potential for further weakening in the product mix. Further, the company has decided not to cover the full costs associated with the RE three wheeler upgrade (mid-August) which could dilute margins. Management expects margin pressure from metal and imported component cost increases in 2HFY14 due to the INR depreciation. In exports, USDINR rates are expected to be similar to levels sequentially limiting upsides to export realizations. However, we expect the mix to remain better than 1QFY14 and factor in an EBITDA margin decline of 100bps qoq and expect margins to be at 20.6% in FY14. Valuation: We expect revenue to grow at 11% CAGR for FY13-15E to Rs. 247bn and expect margins to expand 230bps to 20.5% leading to an EBITDA CAGR of 18% to Rs 50.65bn. We estimate PAT in FY15 to be at Rs 40.2bn and value the stock at 15x FY15E EPS of Rs 139 and arrive at a TP of Rs 2,086. We maintain our Reduce rating on the stock.

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