Bajaj Auto - Favourable Currency & Better Realisation in Overseas Markets to Drive Profitability - Karvy

In Q3FY13, the performance of Bajaj Auto (BAL) came in line with our expectations on revenues and margins front. Its revenues rose 8.6% YoY to Rs.54.1 bn in Q3FY13 vs. our estimate of Rs. 54.4 bn, as the hike in vehicle prices and better product-mix resulted in 4.6% YoY rise in average realization per vehicle. Rise in three-wheeler exports to Egypt and higher contribution of three-wheeler led to sequential rise in margin. BAL's EBIDTA margins rose 30 bps QoQ to 18.7% vs. our estimate of 18.9%. Its domestic volumes rose 8.2% YoY owing to industry-wide slowdown in two-wheelers, while exports dipped 1.2% YoY. Its NPM rose by 23 bps QoQ (down 158 bps YoY) to 15.1%, as its non-operating other income rose 21% YoY (22% QoQ) to Rs. 2 bn. Its EPS rose 3% YoY (10.5% QoQ) to Rs. 28.3 in Q3FY13.

Strong Exports with Favourable Exchange Rate - Better Profitability: BAL has hedged most of its FY14E exports i.e. $900mn @Rs. 53-62/Dollar (expected average is Rs. 54/Dollar), which is ~65% of its FY14E exports (vs. FY13 realisation of ~49/Dollar), which would be translated into benefit of 170-220 bps in its EBIDTA margins. The shortfall in Sri Lanka will be suitably compensated by the growth in other markets i.e. Africa, Bangladesh, & Egypt. Current weaker currency provides headroom for hedging FY15 exports at favourable exchange rates. Moreover, BAL plans to launch new three-wheeler portfolio over next few months, which would also fuel replacement demand.

Healthy Return Ratio & Cash Flow Expected in FY14E: High export realisation, rising contribution of three-wheeler segment and launch of high value products (New 100T) would translate into 200 bps rise in margin & 43% RoE in FY14E, which may lead to expansion in BAL's multiple to 15x1 year forward P/E. Its Cash & Cash Equivalent stood at Rs. 53.74 bn at Q3FY13-end.

Outlook & Valuation

The stock currently trades at P/E of 12.8xFY15E. We reiterate our "BUY" recommendation on Bajaj Auto with price target of Rs. 2,460 apiece, valuing stock at 15xFY15E and adding Rs. 60/share for stake in KTM. We maintain our FY13, FY14 & FY15 EPS estimate at Rs. 107.8, Rs. 143.8 & Rs. 160, respectively.

Source : Equity Bulls

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