Bajaj Auto - Company Update - Reliance Securities

Launches newer products to stay ahead of peers

- New Discover launched to target low end customers: Last month, Bajaj Auto (BAL) launched a new variant of Discover with a price of Rs42,000. Over the years, the company has been focusing on high margin products. Though, BAL continues to do so with new launches like KTM and the new Pulsar, it is taking steps to further strengthen its position in low margin products, through which it can target a larger customer base. Considering this, the company has launched the new variant of Discover. Currently, Bajaj Auto sells more than 100,000 units of Discover every month, of which more than 65% accounts for 125CC or above category, while 35% is below 125CC. Recent launches of KTM and the new Pulsar (which will be shortly available in the showrooms) will enable the company to largely maintain its growth momentum and leadership position in this segment. Moreover, the launch of new Discover at an entry point of Rs42,000 will aid it to improve its presence in below 125CC segment.

- Strong volume and margin guidance: Management has indicated that Bajaj Auto's volume is likely to grow ~15% to 5mn units in FY2013E. The company had registered a volume growth of ~14% in FY2012, with two-wheelers and three-wheelers growing at ~13% & ~18% respectively. Growth of two-wheelers has slowed down in the last four months with yoy volume growth remaining in single digit. Management expects that the demand for two-wheelers should pick-up from May. Further, management is confident of maintaining EBITDA margin of ~20% despite the new Discover launch.

- Strong growth in exports: BAL has maintained strong exports growth over the last few quarters. Export revenues have grown 40%, 50% and 51% yoy in the last three quarters driven by volume growth and higher realizations. Exports realization increased 6%, 9% and 18% yoy in the last three quarters. We believe that the recent INR depreciation is likely to aid export realization rate and enable the company to report healthy growth in exports revenues.

Outlook and Valuation

We have revised our estimates marginally upwards given the robust guidance by the Management. We have conservatively factored in a volume growth of 12% for FY2013E given the subdued demand environment currently. Further, we expect margins to decline on account of higher sales of low margin product and higher selling and marketing expenditure due to increased competition. However, we still expect the company to report strong CAGR of 15% in top-line and 13% in bottomline during FY2011-FY2014E. We are now rolling over to FY2014 estimates, which gives us a target price of Rs1,840, indicating an upside of ~21% from the current levels. In our view, the recent correction in stock price provides a good opportunity for medium-to-long-term investors, and hence, we upgrade the stock to a Buy.

Risks to the view

- Prolonged slowdown in demand to impact volume growth
- Higher than anticipated increase in raw material prices.

Source : Equity Bulls

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