Bajaj Auto - Management meet: Currency tailwinds; demand headwinds - PhillipCapital

We met the management of Bajaj Auto recently. While the company seemed confident of maintaining high margins (in excess of 20%) due to the currency benefits; volumes are expected to remain subdued. We believe current valuations factor in the mixed outlook for the company. Maintain Neutral.

FY15 exports unhedged; potential benefits possible. Nearly 30% of FY14 and virtually the entire FY15 exports remain unhedged. The current hedges imply a realization of Rs59/USD for Q2FY14 and Rs61 for H2FY14 - this is against a currency rate of ~Rs56 in Q1FY14. Hence, at the current exchange rate currency movements will be beneficial in the coming quarters.

In addition, the company indicated that it had not passed on any "substantial" portion of the benefits in its export markets (there might have been some price adjustment in Sri Lanka/Nigeria). Hence, the currency movements should be able to offset any margin pressure on account of an upward movement in raw material costs. The management expects margins to remain in the 20%+ range.

Domestic market: Discover launch is critical. The management seemed surprised with the sudden loss in the market share of the Discover in the executive segment. To counter regain share the company will be launching six new variants of the brand in the coming quarter. These launches will be in addition to the existing 4-5 variants currently available. The management eventually expects a few variants to be discontinued on lower demand. A gradual discontinuation of older variants could potentially damage the brand equity of the Discover.

On the whole, the domestic remains weak with inventory levels rising to over 5 weeks. The high inventory levels imply that closer to the festival season, the company may not be in a position to substantially raise dealer stock. The retail volumes have remained lackluster although there could be some improvement in H2 as the monsoons have been strong.

Exports - Kawasaki tie will be important but the ramp up is likely to be slow. For FY14, the company expects exports to grow at ~5% in volumes and 15% in value - this implies a growth of ~15% in the remaining year. This would be optimistic in our view. The company expects growth in certain market such as Nigeria, Egypt, Tanzania where it expects to further gain marketshare. However, there are also certain geographies, notably, Sri Lanka and Latam where the management expects Bajaj Auto's growth to be inline with the market.

In addition, the company will be exporting the first Bajaj- Kawasaki motorcycle to Indonesia in October. Over the longer term, the tie-up will expand its footprint to other ASEAN countries and certain countries like Brazil. However, the expansion is likely to be slow - e.g, the Brazilian market is likely to be targeted only by FY17.

Mixed outlook, maintain Neutral. Bajaj Auto represents a dichotomy - while the company's margins are likely to continue to be substantially superior to competitors; its position in the domestic market seems to be weakening.

Source : Equity Bulls

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