Bajaj Auto - Good 2Q, but valuations fair; Sell - Anand Rathi

Motorcycle demand weak. In 2QFY14, motorcycles demand remained weak for Bajaj Auto, owing to intense competition. During the quarter, total sales were down 8.4% yoy. Of this, motorcycles declined 8.5% and three wheelers 7%, yoy, on lower base of the previous year. While domestic sales declined 14.9% yoy, exports grew just 2.8%. Although the company is planning a slew of variants to combat demand slump, we expect this to continue into 2HFY14, unless there is an external policy-led trigger.

Revenue and EBITDA higher. Revenue growth, to Rs. 51.7bn, was driven by 14.7% growth in realizations, which more than made up for the 8.4% yoy dip in volumes. Realisation growth was driven by a more beneficial exchange rate of Rs. 60.9 to the dollar (Rs. 55.6 in 1QFY14 and Rs. 50.0 in 2QFY13). Export revenues, at Rs. 21.2bn, were the highest (quarterly) thus far. Boosted by aboveexpected realizations, the company's EBITDA margin (adjusted for forex loss) improved to 22.6% (up 220bps qoq and 400bps yoy); EBITDA growth was 26.3% yoy. Due to weak domestic demand, exports constituted 41.7% of total volumes in 2Q against 37% in 1Q, boosting the company's operating margins. The strong operational performance boosted Bajaj Auto's adjusted profit 20.2% yoy, to Rs. 8.6bn, despite a higher tax rate of 30.9%.

Our take. The key positives of better export realisations and a low base of high-profit three-wheeler division appear to be captured in the stock price. Additional positives are strong cash-flow generation and consistently high EBITDA margin of the Indian auto industry. However, weak domestic demand, together with keener competition, could continue eroding market share. We, therefore, maintain Sell on fair valuations, as the stock is trading well above the historical average. At the ruling price, it is trading at 15.9x FY15e EPS. Risks. Faster-than-expected demand recovery, further favourable forex movements.

Source : Equity Bulls

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