Bajaj Auto - Living dangerously - ElaraCapital

Pulsar sales crash hard in December; a Discover encore?

Bajaj Auto (BJAUT IN) December bike sales surprised us on the negative, as it saw a sharp fall in Pulsar sales (down ~45% YoY), the first such fall in three years. While poor total domestic bike sales performance was known last week, we were surprised that it was led by a cut in Pulsar sales, against our expectation of a fall in Discover sales, given it was undergoing a model changeover (Discover M). We note Pulsar sales have been doing well for the company to date (up ~27% in Q2FY14 and ~5% until November 2013) and had given crucial support to overall volume growth and margin, in the face of rapidly declining Discover model sales in YTD FY14. The sudden fall in Pulsar sales worries us, as it reminds us of the trend seen in Discover125 earlier (recorded 0.2% volume growth in FY13 vs minus 50.1% in YTDFY14), where volume saw a free fall post a steady run.

Poor visibility over volume revival; product mix turns adverse

Weakness in Pulsar volume raises concerns over turnaround in Bajaj's domestic bike sales (down ~16% in YTD FY14). Both key brands viz. Discover and Pulsar have seen volume falling, despite launching variants, which raises questions over likely volume growth revival in FY15 despite low base. As noted earlier in our note Signals on 19 December 2013, the Discover brand needs to raise monthly volume run rate by ~20k units just to come at par with base, a tough ask given poor demand for executive bikes currently. Now, with Pulsar sales looking weak, visibility over volume growth and margin turns low as weak Pulsar sales will result in poor product mix, and, margin.

Rapid market share fall threatens P/E de-rating

Bajaj Auto has seen rapid market share erosion and now stands close to being the fourth player in the domestic 2W market. While investors ignored costly absence from the fast growing scooter segment given steady performance in bikes and growing exports, we believe in the absence of a quick revival in market share, Bajaj runs the risk of seeing de-rating given rich valuations.

Valuation - cut target price to INR 1,892; reiterate Reduce

We have lowered our volume and margin assumptions for FY14E and FY15E, leading to a 5-7% cut in our earnings estimates. We remain concerned over earnings profile, which lacked visibility and remain driven by currency, and expected valuation premium over Hero Motocorp to expire, which is duely in progress and is expected to continue in FY15 as well. We cut our target price to INR1,892 from INR 2,003 and reiterate our Reduce rating on the stock.

Source : Equity Bulls

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