Bajaj Auto - Strong quarter, but challenging outlook - Standard Chartered Securities

IN-LINE, BJAUT IN, CMP INR 1967.05, Price Target INR 1952.0

- Bajaj Auto's (BAL) 1QFY14 earnings at INR 8.1bn were ahead of IER's estimates, led by better-than-expected margins.

- Operating performance was aided by favourable currency movement in 1QFY14.

- Favourable currency hedges are likely to further improve margins in subsequent quarters, in IER's view.

- However, the volume outlook continues to remain uncertain in both domestic and export markets.

- The stock appears fairly priced at current valuations. IER maintains its In-Line rating with a revised price target of INR 1,952 (versus INR 1,910 earlier)

1QFY14 revenue in line with IER's estimates: Revenue remained flat q/q at INR 49.6bn and was in line with IER's estimates, led by 7% y/y growth in average realisations, even as volumes declined 9% y/y. Export realisations were up sharply by 21% q/q, led by favourable currency movement. Domestic realisations, however, declined 5% q/q due to a poor mix in favour of economy-segment bikes.

Operating performance boosted by favourable currency: The operating margin (adjusted for an MTM forex loss of INR 960mn) was 21.3%, ahead of IER's estimate of 19.8%, led by better-than-expected export realisation (IER had assumed that BAL would partially pass on the currency benefit to consumers). This was aided by favourable currency hedges – average USD-INR realisation for the quarter was at 57.4 versus 51.6 y/y. As a result, EBIDTA grew 10% y/y despite a volume decline.

Earnings ahead of IER's estimates on improved margins: Other income stood at INR 1.2bn and included dividend income of INR 270mn from KTM. The average tax rate for the quarter was steady at 29%. Led by better-than-expected margins, PAT grew 13% y/y to INR 8.1bn, ahead of IER's estimate of INR 7.45bn.

Valuation: While margins seem to be protected by favourable currency movement, the volume outlook remains uncertain. IER realigns its assumptions post 1QFY14 results, lowering our FY14E volume to -1% growth (+3% earlier) and increasing margin to 20.5% (20% earlier). Given an uncertain demand environment, we believe the stock is unlikely to be re-rated. It appears fairly valued at 13.5x FY15E earnings and 10.8x EV/EBITDA. We maintain our In-Line rating with a revised price target of INR 1,952, implying 13x FY15E earnings.

Source : Equity Bulls

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