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Bajaj Auto - Margin improvement enables outperformance - Kim Eng
Posted On : 2013-01-18 22:48:03( TIMEZONE : IST )
3Q EPS of Rs28.3, +11% QoQ, and +3% YoY, was 10% above our estimate. The surprise in QoQ EPS growth came from 1) 14% increase in domestic volume, 2) better selling price and 3) a 60bp increase in gross margin. BJAUT's product differentiation strategy is working well in a sluggish 2-wheeler market. Its two new launches 'Pulsar NS200' and 'Discover 125ST' are driving incremental volume. We are factoring in volume growth of 7.5% for BJAUT for FY14 vs. sector growth of 6% due to additional volume from the recently launched 100 cc 'Discover T'. Our new EPS for FY14 of Rs133.7 is 14% higher than the previous estimate, aided by margin improvement. We upgrade BJAUT to BUY from HOLD. Our new TP of Rs2,400/sh (+24%) is based on PER of 18x FY14F.
BJAUT's 3Q performance establishes its edge over competition. This is because its new launch, 'Pulsar NS 200', achieved volume of 10k units and 'Discover 125 ST', added 35-40k units on monthly basis. This allowed the company to improve the proportion of premium motorcycles in its mix to 70% of total volume from 65% earlier. While competition provided discounts, BJAUT managed to increase selling price by 2.6% and increase revenue by 8% QoQ to Rs54bn.
We trim FY13F volume to 4.3m (unchanged YoY) but expect 7.5% growth for FY14 to 4.7m units. For FY14F we assume 6% increase in exports and 8.5% increase in domestic volume. We are confident that incremental volume of 400k units for FY14 will be largely met by the newly launched 'Discover ST 100', which is a mass-market product (65% of motorcycles are sold in the commuter segment/100cc).
3Q gross margin +60bp QoQ to 24.1%. This was driven by better sales mix and increase in export value due to weak INR. We are factoring in a 100 bp increase in gross margin to 24.3% for FY14 due to further improvement in sales mix and rising volume. Our EPS of Rs133.7 (+19%) for FY14F will also be supported by increase in treasury income because its cash pile is big at Rs73bn, and CAPEX requirement is low.
PER of 16x FY14F is now similar to HMCL. Until last year, the BJAUT stock traded at a discount to Hero Motocorp (HMCL). But due to strong outperformance, it deserves to trade at similar valuation to its arch rival. It pays out more than 50% of profit and offers dividend yield of 3.6%.
