Bajaj Auto - Favourable Fx to drive earnings; maintain Buy - Centrum

Bajaj Auto (BAL) for 1QFY14 reported total operating income of Rs.49.6bn (flat YoY, up 2.5% QoQ) higher by 2.1% against our estimate of Rs.48.6bn largely on account of better realizations. We note that the company reported a notional MTM loss on range forward contracts of Rs960mn, which would reverse during the tenure of the contracts. Reported EBITDA margin was 19.3% (in-line), and ex-forex loss, EBITDA margin would have been 21.3%, higher than our estimate of 19.5%. Adjusted PAT stood at Rs.7.4bn against our estimate of Rs.7bn. Though domestic motorcycle growth is likely to remain moderate for FY14E, the company is betting on Discover launches (6 new Discovers expected by end FY13E) and aims to revive its market share in the Executive segment. However, it remains confident of achieving 10-12% volume growth in the domestic 3W segment for FY14E driven by the success of its diesel variant, new upgrades by 2QFY14E and possible opening up of permits. For exports, it has revised growth estimates to 5% against earlier guidance of 10-12% for FY14E. We continue to remain positive on the stock and maintain Buy rating with a revised target of Rs.2,240 driven by upward revision in earnings.

Operational highlights: Total operating income stood at Rs.49.6bn (flat YoY, up 2.5% QoQ) higher by 2.1% against our estimate of Rs.48.6bn largely on account of better realizations. Net realizations stood at Rs.49,105 up 12.4% YoY and 3.6% QoQ, higher than our expectations. While domestic realization stood at Rs.47,554 (up 6% YoY but 5.0% lower QoQ), export realizations stood at Rs.51,743 (up 24% YoY and 1% QoQ). We note that the company reported a notional MTM loss on range forward contracts of Rs960mn, which would reverse during the tenure of the contracts. Reported EBITDA margin was 19.3%, in-line and ex-forex loss, EBITDA margin would have been 21.3%, higher than our estimate of 19.5%. Adjusted PAT stood at Rs.7.4bn against our estimate of Rs.7bn.

Conference call highlights: 1) Near-term demand environment in domestic 2W industry to remain weak. It expects the industry to further decline by 2-3% in 2QFY14E after subdued 1Q (June retail declined 11% and July likely to decline further by 5%). However, the company is hoping for recovery from 3QFY14 on the back of positive sentiment from good monsoons and the festival season. 2.) Management expects 2W export monthly run-rate to improve from 95k to 110K going forward and 3W export run-rate to be at 25K 3.) The company has hedged US$740 mn exports for remaining 9MFY14 in the 55-66 range. It has also hedged US$91 mn exports for FY15E in the range of 58-68. Its Rs/$ realization in Apr/May/Jun'13 was 53/55/57, with average for Q1FY14 at 55.56. Going forward, the company expects Q2/Q3FY14 realization at 58.5/59 respectively, if Rs/$ stays at the current level. 4.) Capex will be Rs4bn in FY14E, of which Rs1bn will be spent on R&D and the rest on capacity expansion of 600k units at Waluj.

Valuations and Recommendations: At the CMP of Rs.1,992, the stock is currently trading at 15.9x FY14E EPS of Rs.125 and 13.4x FY15E EPS of Rs.148.8. We continue to maintain our Buy rating on the stock with a target price of Rs.2,240 (based on 15x FY15E Core EPS + Rs.275 of Cash + Rs.67 of investments in KTM).

Source : Equity Bulls

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