Bajaj Auto - Positives priced-in - Antique

New products to aid domestic 2Ws

If the initial response of the recently launched Pulsar 200NS and Discover 125ST is anything to go by (the design of which would flow down to all Pulsars/Discovers), the company seems to be ontrack to regain some of the lost market share in the domestic motorcycle segment. This will also aid a strong uptick in domestic realisations (as was witnessed in 2QFY13).

On the export front, Egypt has resumed full normalcy, whereas Sri Lanka has resumed ~80% normalcy (better than earlier envisaged). Currency tailwinds would also continue as the company has begun taking fresh hedges for FY14 at a favourable USD rate (~55 being the lower end of the band; current realisation ~50).

Duty drawback could impact margins/EPS by ~120bps/5% (worst case!)

The government has reduced the export duty drawback on 2Ws & 3Ws from 5.5% to 2% (with effect from 10th October 2012). Given their focus on profitability, Bajaj has guided that they plan to pass on this 3.5% shortfall (as it had done earlier, when DEPB @9% was reduced to the duty drawback @5.5%).

However, should they not pass it on (given the headwinds in some of their export markets), margins would be impacted by around ~120bps, which would trickle down to an EPS downgrade of ~5%. This is the worst-case scenario, in our view.

RE60 launch - Trying to stay ahead of the curve!

With the rising popularity of mini-trucks (Tata Ace, in particular), the 3W goods-carrier segment is a dying one. There is always a fear of the same happening to the 3W passenger-carrier segment as well (with the Tata Magic/Magic Iris). This is a cause for worry for Bajaj Auto, as 3W (passengercarriers) accounts for ~30% of the company's EBITDA.

Hence, in our view, the RE60 is a very proactive product launch, as it targets the existing 3W customers who might want to upgrade to a 4W in the future. RE60's margins are expected to remain as astronomical as those of the current 3Ws (~30%) which should protect the company's coveted high margins as well.

Positives priced-in... Downgrade to HOLD!

While we prefer Bajaj Auto between the two 2W biggies, staying true to our underlying theme, we would avoid the 2W pack for now. Post the recent run-up in the stock, we downgrade our recommendation from BUY to HOLD, with a target price of INR1,856 (13.5x FY14e EPS + INR52 for the stake in KTM).

Source : Equity Bulls

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