Bajaj Auto Limited. - Q2FY14 Update, CMP Rs.2150, Rating change to Hold, Target Rs.2250 - Sushil Finance

CMP Rs.2150, Rating change to Hold, Target Rs.2250

Bajaj Auto Limited (BAL) registered strong Q2FY14 results driven by a robust growth on the exports front aided by favourable currency movement. Some of the key highlights of the result are as follows:

Key Highlights of Q2FY14

- During Q2FY14, BAL's Net sales stood at Rs.50615 mn vis-à-vis Rs. 48171 mn in Q2FY13, delivering a growth of 5.1% YoY. On the Volume front, the company saw a dip of 8.4% YoY to 961330 mn units in Q2FY14. Out of the total turnover of Rs.52990 mn, Exports business which registered a YoY% growth of 26% contributed ~41% to the total revenue on the back of weak domestic demand thereby helping in boosting the company's operating margins. On average realizations front, BAL registered a growth of ~14% YoY & ~7% QoQ with robust growth in domestic (superior product-mix) & export (favorable exchange rate - exports booked at Rs. 60.9/$, against Rs. 55.6/$ in Q1FY14 and Rs. 50/$ Q2FY13) realizations.

- On the volume front, the management expects H2FY14E to be better led by festive season sales and good monsoon (Q4FY14 to see the actual benefit of favorable monsoon). However, the initial signs of festive demand have not been very encouraging with sales remaining largely flat YoY. With the 6 new launches expected by Feb 14 management expects monthly run-rate of Discover to improve from the current 70-75k units to over 100-110k units. On the 3W front, the company expects conversion of opening up of 50k new permits in Maharashtra to drive volumes. However, no time line is clear as of now on the same. BAL has also seen strong replacement 3W demand. On the exports front, Pulsar has seen its monthly volume increase from 45k units to 64k with the management expecting it to continue, driven by higher sales in Indonesian market through its JV with Kawasaki.

- During the quarter, EBIDTA came in at Rs. 11319.6 mn registering a YoY growth of 23.7% led by better realization and a superior product-mix. EBIDTA margins improved to 21.9% v/s 18.4% in Q2FY13 & 18.5% in Q1FY14. The company also booked a notional MTM loss of Rs. 390 mn under other expenses of which 70% could reverse on maturity of underlying contracts if currency stays at current levels and no fresh export hedges are undertaken. Adjusted for this, EBIDTA margin was at 22.6% for the quarter. We believe EBITDA margin could face headwinds in H2FY14 as currency benefits (Q2 realization 60.9/$) have peaked for FY14, product mix would turn less favourable with a likely higher proportion of Commuter & Executive segment bike sales (Discover M launched recently + 5 more Discover variants by Feb 14) & likely commodity cost pressures expected with the recent price hike of 1.5-2% in the domestic 2W segment only partially compensating the increase in raw material costs. Also, the company has not passed on the increased cost (up to Rs. 3-4k per unit) pertaining to the face lift of its 3W which could put pressure on the margins going forward.

- Lower other income (due to drop in investment income) and higher tax (Tax rate - 30.9% v/s 28.8% in Q2FY13) restricted PAT to Rs. 8372 mn, a growth of 13% YoY & 13.5% QoQ.

OUTLOOK & VALUATION

Even though the management expects the domestic motorcycle industry to register a growth of 5-6% in H2FY14 along with likely issue of 50k 3W permits in Maharashtra to drive 3W growth, we believe, with the competitive scenario & new model launch intensity turning aggressive (Specially HMSI and Hero Moto) in a sluggish domestic market, significant upsides are likely only if the new vehicle launches (6 new Discovers) are successful for BAL. However new products, Kawasaki alliance and expanding geographies (led largely by Africa - price cut taken paying dividends coupled with expanding presence in Sudan, Kenya, Tanzania etc. & some risk aversion happening in Egypt) would continue to provide the necessary boost to its export volumes. We believe sequential margins could be under pressure for the company with no major improvement expected in Rs/$ realization from these levels, a full impact of new Discover launches in H2FY14 & higher commodity costs. We see limited upside from here due to the recent run-up in stock price & believe further re-rating will only happen once the company starts regaining its lost market share in the domestic market. We thereby recommend a HOLD on the stock with a TP of Rs.2250 (17x FY15E EPS of Rs.132.5).

Source : Equity Bulls

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