Company Update on Bajaj Auto with a Buy recommendation - Angel Broking

Bajaj Auto's (BJAUT) motorcycle export volume, which declined by ~9% in 1HFY2014, is expected to recover and grow at a strong double-digit rate going ahead, leading to a ~10% CAGR over FY2013-15E. We expect the growth to be driven by market share gains in Africa and Latin America at the expense of Chinese players who currently dominate these regions with a market share of ~70%. We believe that the dual effect of INR depreciation and Yuan appreciation against the USD, has made Indian players more competitive globally and reduced the pricing advantage which Chinese manufacturers have been enjoying over the years. Thus the value proposition of Indian products which are superior in quality has increased and should therefore pave the way for rapid market share gains going ahead.

Among the Indian manufacturers, we expect BJAUT to be the biggest beneficiary of this opportunity given that it has the first mover advantage, wide-spread reach with an established distribution network and a strong brand presence in the major markets of Africa and Latin America. We reckon the opportunity in Africa and Latin America to be in excess of ~7mn units annually (growing in double digits over the last five years) of which BJAUT has less than 15% share as of FY2013. We expect the company's top-line to register a strong CAGR of ~12% over FY2013-15E driven by robust export revenue growth of ~24%, aided by the INR depreciation. The domestic revenue growth, however, is expected to remain muted at ~5% due to modest growth in volumes. We expect EBITDA margins to sustain around ~20% levels in FY2014/15 led by favorable exchange rate and superior product-mix. Consequently we expect the earnings to increase at a strong CAGR of ~16% over FY2013-15E.

We maintain our positive stance on the company given its diversified business model, strong focus on profitable growth, widening reach in the export markets and strategic alliances with global majors. At the CMP of Rs. 1,908, the stock is trading at 13.4x FY2015E earnings. We recommend a Buy rating on the stock with a target price of Rs. 2,272.

Source : Equity Bulls

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