Bajaj Auto Limited - Chicken soup for the risk-averse! - ANTIQUE

PAT at INR7.38bn (up 3% YoY/down 4% QoQ) was below our estimate of INR7.61bn (consensus INR7.4bn) primarily due to a notional M2M forex loss of INR960mn (which would reverse over the tenure of their hedging contract). Adjusting for this forex loss, EBIDTA margins were at 21.3% (up 241bps YoY; 204bps QoQ) as against our estimate of 19.8%. Strong margins were aided by better currency hedges (export realisation of 55.6 vs. 49.5 QoQ) coupled with better mix (3Ws at 12.2% of volumes vs. 8.9% YoY/ 12.4% QoQ). While the mix shouldn't improve further, export USD realisation would (to around INR58 next quarter).

We have a HOLD reco owing to marginal headroom for re-rating (FY14/15 P/E at 16.1x/14.4x) but would use any cool-off as a buying opportunity. Bajaj's strong FCF yields (>5%), return ratios (>50%), and dividend yield (~3%) provides a hedge against a worsening macro, and hence a good flight to safety in current environment.

1Q results –Currency tailwinds begin...

PAT at INR7.38bn (up 3% YoY/down 4% QoQ) missed our estimate of INR7.61bn (consensus INR7.4bn) solely due to a notional M2M forex loss of INR960mn, which would reverse over the tenure of their hedging contract.

Adjusting for this forex loss, EBIDTA margins were at 21.3% (up 241bps YoY; 204bps QoQ) as against our estimate of 19.8%. Blended realisations were up 11.1% YoY (2.8% QoQ) – slightly higher than our estimate. Export realisations were up a staggering 23.7% YoY (20.9% QoQ) due to a strong export mix (3Ws at 62% of exports vs. 53% YoY/50% QoQ) coupled with better currency hedges (export realisation of 55.6 vs. 49.5 QoQ). Implied domestic realisations were up 4.3% YoY (down 5.9% QoQ). The company has benefitted to the tune of INR2bn from the weaker INR, with scope to benefit another INR1bn going ahead.

Other income (INR1.2bn) includes INR470m VAT refund and a dividend from Bajaj Auto International Holdings BV (the holding company of KTM) of INR270m. Even after this, other income was slightly lower than estimated due to some staggered maturity of some FMPs.

Better placed should macro worsen further:

While there is less headroom for re-rating (FY14/15 P/E at 16.1x/14.4x), we would use any cool-off in the stock (owing to modest volume growth) as a buying opportunity.

For starters, 2Ws are better placed (compared to cars/CVs) in a tough macro as they are relatively less discretionary a purchase (they cater to the basic need of commuting). While Bajaj also benefits from a weaker INR (they will realize INR57-58 from next quarter onwards and have started hedging FY15 >INR58), we believe that they are a high dividend paying candidate as well. Cash and equivalents at the moment are >INR70bn, while FCF going ahead should be ~INR30bn (on a steady-state capex of
We have a HOLD rating (target price of INR2,132/sh - 15x FY15e EPS + INR67 for the stake in KTM) solely due to being restricted by marginal absolute upside from current levels, but the stock is a good hedge against a prolonged macro stalemate.

Source : Equity Bulls

Keywords