Bajaj Auto - Margins weak as outlook remains clouded... - ICICI Direct

Bajaj Auto (BAL) reported its Q1FY13 numbers, which missed our estimates on the topline, EBITDA margins front. This was led by realisation, unit dip (160 bps QoQ) along with increased employee costs. EBIDTA margins (as per revised schedule VI) came in at 17.9% (down 190 bps QoQ). As we mentioned earlier, BAL remains weak in the domestic market owing to the competitive intensity, which has been evident in Q1. The "harbinger" export markets have to grow faster (de-growth of 3% YoY in Q1); otherwise one can say goodbye to volume targets set by the management for FY13E. We continue to believe that at a CAGR earnings growth of ~9% (FY12-14E), PEG of 1.3xFY14E the stock remains fairly priced at the moment. We maintain our HOLD rating on the stock.

Forgettable quarter but is it the bottom?

BAL's Q1FY13E is completely forgettable as ASPs fell 1.6% QoQ owing to a weakness in the product mix as three-wheeler sales fell 20% QoQ (sales hit in Sri Lankan & Egyptian markets). This coupled with employee costs jump of 70 bps QoQ, accentuated the margin drop to 17.9% (down 190 bps QoQ). The other income component, significantly higher at Rs.182 crore, helped shore up profits as tax rate rise came into effect in FY13.

FY14E the only thing to look forward to as margin vagaries a concern...

The premium BAL had due to margins staying in a stable band that drew investor interest all the time. However, with a decline in Q1 & clouded outlook of volume growth in FY13E, the premium would erode. On the brighter side, FY14E appears to be better as export realisations would be ~10% higher even as volume outlook is clouded. However, we also raise a flag as BAL is generously spending on non-revenue generating assets (aircraft: ~Rs.265 crore). We feel this should not be a priority among more important things to channelise shareholder's funds.

Valuations only major comfort left

We remain cautious on volume growth in the domestic, export markets as earnings would remain muted. However, on the flip side, with valuations at ~12.5x PE, ~1.3x PEG FY14E and cash throwing nature, the downside in the immediate sense remains limited. We maintain our HOLD rating.

Source : Equity Bulls

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