Bajaj Auto - Positives priced in, maintain Hold - Centrum

We continue to retain Hold with TP of Rs2,114. Though revenue and EBITDA were marginally better than our estimates, PAT was in line due to lower other income and higher tax rate. We see limited scope of margin improvement from 2QFY14 levels. While better product mix in the domestic motorcycle segment and Fx helped the company post strong margins, we expect the product mix to worsen with the full impact of new Discover launches in 2H'14 and no major improvement in Re/$ realization from 2Q levels. We recommend a switch to Hero MotoCorp on reasonable valuations (P/E of 14.1x FY15E, 11% discount to BAL), ability to retain its market share and strong presence in fast growing scooter segment and rural markets.

- Limited levers for margin expansion from 2QFY14 levels: We see headwinds in sustaining EBITDA margins at 2Q'14 levels due to 1) Worsening Product mix from 2Q levels as the full impact of new Discover launches is likely to be felt in domestic MC segment from 2H'14 2.) The management pegging INR/USD realizations in the same range as in 2Q'14 (Avg INR/USD realization was 60.9 vs. 50 in 2Q'13 and 55.6 in 2Q'14) 3.) Under pricing products in the domestic 3W segment up to Rs3-4k/vehicle for recent upgrades and 4.) Recent price hike in the domestic 2W segment only partially compensating the increase in raw material costs.

- New Discover launches to help partially regain lost ground: BAL lost 230bps in the overall domestic MC segment in 2Q'14 vs. 1Q'14 and 400bps compared to FY13. We believe the new Discover launches will help the company regain lost ground but it will still not be able to gain its peak market share in the domestic executive segment. Management indicated that festive demand was only average during Ganesh Utsav and Navratri. It maintained export growth at 5% for FY14 - 1H run rate thus far implies ~16% YoY growth over 2H - which is challenging, if the company continues to face macro headwinds in key markets of Africa (Nigeria and Egypt).

- Revenue and EBITDA up, PAT in-line: Total income at Rs52.1bn vs. Rs50.1bn, was higher by 4% largely due to better ASPs. Blended ASPs stood at Rs52,651 (up 15% YoY and 7% QoQ). Driven by better realizations, despite a YoY/ QoQ drop of 8.4%/1.8% in overall volumes, net revenues grew 5.1%/5.3% YoY/QoQ respectively. EBITDA margins stood at 22.4% (up 272bps YoY and 304bps QoQ) compared to our est. of 21.9%, up 45bps. Reported PAT was Rs8.4bn, higher by 1.5% vs. our est. of Rs8.2bn. Despite the rise in EBITDA level, lower than expected other income (Rs9.14bn vs. our est. of Rs11bn) and higher tax rate (31% vs. est. 29%) led to in-line PAT.

- Valuations and Recommendations: The stock currently trades at 18.0x/15.9x FY14E/FY15E EPS. We believe current valuations largely factor in most positives and EBITDA margin is likely to have peaked out; we maintain our Hold rating on the stock with TP of Rs2114 (15x Sept 2015 Core EPS + Rs305 of cash). Key upside/downside r-+isks are 1) Higher than expected success/failure of new Discover launches and 2) Stronger than expected revival /continued headwinds in its key export markets.

Source : Equity Bulls

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