Bajaj Auto - Expect a better 2H - IIFL

Following a muted 2Q (weak demand, inventory correction, and calendar shift), two-wheeler companies are likely to see better growth starting 3Q. Management's FY13 motorcycle growth guidance implies 7-9% growth in 2H, much better than the 1% decline seen in 1H. Bajaj's recent launches have been reasonably successful and they helped in partial recovery of lost market share. Price increases in select product lines in India and a few export markets, coupled with lower commodity prices should support Ebitda margin in FY13. Currency will boost FY14 margins. The company has hedged 40% of its FY14 export receivables so far at favourable exchange rates. We maintain our estimates and TP of Rs1,780 (14x FY14 EPS).

Management expects motorcycle growth to improve in 2H: Twowheeler companies were impacted in 2Q due to weak demand, the resultant need for inventory correction, and calendar shift of the festive season. Motorcycle industry volumes declined 1% in 1H. Management's FY13 guidance of 3-4% growth implies a 7-9% volume growth in 2H. Volumes in the early festive season have been flat to slightly positive.

Price increase, lower input costs to support FY13 margins; currency boost in FY14: Bajaj selectively increased domestic prices across product lines in Oct 2012. In the export markets, Bajaj plans to increase prices in select markets to offset about 75-80% of the impact of cut in export incentives. The company is also likely to benefit due to lower commodity prices starting 3Q. Bajaj has so far covered FY14 export receivables of US$600mn using range-forward contracts with a low-end USD-INR rate of 53 (FY12 was covered at ~50).

Maintain estimates and TP: Although FY13 will end up being a weak year for Bajaj (3% EPS decline), FY14 is likely to see strong earnings recovery, led by improvement in industry-level demand and currencyled margin expansion. The stock is trading at 14.0x FY14 EPS, in line with its 3-year historical average.

Source : Equity Bulls

Keywords