Bajaj Auto Limited - Valuations reasonable, but catalysts missing... HOLD! - Antique

PAT at INR7.65bn (up 2% YoY; down 6% QoQ) beat our estimate of INR7.38bn (consensus INR7.2bn) on account of higher other income. Adjusted margins at 19.2% (down 134bps YoY; 85bps QoQ) missed our estimate of 19.8% (17.6% as per new accounting standards vs. our estimate of 18.5%). While valuations are reasonable post recent correction (FY15 P/E at 12.7x), we see less triggers for the stock to re-rate given the absence of volume and margin triggers in the near-term. While we were earlier very enthused about the expected margin uptick from better currency hedges (mathematically, it can aid a ~300bps margin improvement from here), the muted margin guidance by the management dampened our spirits. Maintain HOLD!

4Q results – Margins miss estimates

PAT at INR7.65bn (up 2% YoY; down 6% QoQ) beat our estimate of INR7.38bn (consensus INR7.2bn) solely on accounts of higher other income (boosted by a sales-tax provision reversal of INR690).

Operationally, EBITDA margins at19.2% (down 134bps YoY; 85bps QoQ) missed our estimate of 19.8% primarily on account of higher other expenses. As per new accounting standards (which treats other operating income differently), EBITDA margins stood at 17.6% vs. our estimate of 18.5%. Lower margins were despite the better product mix this quarter - 3Ws as a % of total volumes were 12.4% this quarter (11.8% YoY/ 12.5% QoQ). Even geographical mix was better - export volumes were 37.2% this quarter (34.2% YoY/33.4% QoQ).

Blended realisations were up 7% YoY (1% QoQ), marginally below our estimate of a 1.5% QoQ increase and hence, revenues (up 3% YoY/down 12% QoQ) missed our estimate by 0.5%. Export realisations were down 8% QoQ on the back of a weaker export mix (lower share of 3Ws in exports), coupled with a lower USD realisation (at 49.5 vs. 49.9 QoQ).

Margin outlook dampened the mood a smidge

Based on fresh hedges, the USD realisation on exports would increase from ~49.5 in FY13 to ~54 in FY14 (hedged in the range of 53-58). Mathematically, this can aid a ~300bps margin improvement from current levels.

However, the management on the call guided that margins would remain in the ~20% range (a very modest 50-80bps improvement) as half of this currency benefit will be reinvested in the export markets (as good as passed on), while the rising contribution of lower-end Discover (6 new Discover variants to be launched in the domestic markets next year) could be margin dilutive as well.

Valuations comfortable, but awaiting catalysts (HOLD)

We like Bajaj for its strong FCF yield and superior return ratios, and post the recent correction, valuations are reasonable as well (FY14/15 P/E at 14.6x/12.7x). However, we don't see many triggers for the stock to re-rate anytime soon. Volume outlook remains muted (Honda's frantic expansion phase certainly doesn't help the incumbents). Furthermore, the quantum of margin improvement is much lower than previously anticipated. We maintain our HOLD recommendation with a target price of 1,965 (14x Sep '14 EPS + INR70 for the stake in KTM).

Source : Equity Bulls

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