Bajaj Auto - Valuations attractive; Buy - Anand Rathi

Weak demand. In 3QFY14, demand for Bajaj Auto's motorcycles remained weak owing to intense competition. During the quarter, its total sales were down 11.9% yoy; motorcycles declined 10% and three wheelers 25.1%, yoy. We expect stability in volumes hereon, with the worst part of volume decline likely to be over. We expect better exports in CY14, along with arresting of the slide in market share.

Stable EBITDA margin. We expect a 2.1% dip in income, to Rs. 53bn, but a 17.7% yoy improvement in EBITDA to Rs. 11.9bn. Our EBITDA margin expectation is 22.5% (380bps higher yoy, stable qoq). We expect the EBITDA per vehicle to grow 33.6% yoy, but decline 1.6% qoq. The contribution per vehicle is expected to be higher 32.1% yoy. Our tax-rate expectation is 31%, which would be 80bps higher yoy. We also expect nonoperating income to be lower 10% yoy. This would lead to a relatively lower 11.8% yoy growth in the adjusted profit, to Rs. 9.2bn, with a 17.3% net profit margin (up 220bps yoy). The adjusted profit per vehicle is expected to be 26.8% higher yoy.

Our take. For 4QFY14, the demand outlook remains unexciting (residual growth estimate 3.5%). Dec '13 performance indicates that motorcycle market share loss persisted (423bps lower in Apr-Nov '13). However, we believe that the worse performance is now factored in the estimates and stock price. The key positives are sustained better export realisations yoy and a higher share of exports in the product mix. Recovery in three-wheeler sales ahead would be an added positive. We have a Buy recommendation on the stock. At our price target, the stock would trade at PE of 15.8x FY15e. The stock is also trading lower to its past three-year average EV/EBITDA multiple. Risks. Later-than expected demand recovery, problems in export destinations, unfavourable forex movements, and higher commodity prices.

Source : Equity Bulls

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