Bajaj Auto - Results in line, tough times to continue - LKP Research

Revenues underperform in Q3, margin sustainability a question

Bajaj Auto's Q3 FY14 numbers came in-line with our expectations with margin performance improving in view of lower other expenses and higher contribution of exports. At the topline, net income fell by 5.3% yoy and 1% qoq, in line with volume decline of 11.9% yoy and a growth of just 3.4% qoq at 993,690 units following a subdued festive season. Volume decline was in line with the significant drop in market share in the domestic markets stemming from weakness observed in their Discover franchise. Net realizations also fell by 4% qoq and grew by just 6.9% yoy as the company took some price cuts in some of the exports markets and also due to adverse product mix over there. With rupee depreciation benefits reducing and RM costs moving up, RM costs as a % of sales moved up sequentially to 70.97% v/s 68.53% qoq. However, other expenses as a % of sales came down to 7.2% as the company cut down the discounts and marketing spends. Other expenses also included a MTM gain of Rs950 mn. EBITDA margins came in at 22.9%, while adjusting for these MTM gains, margins were at 21.1%, slightly higher than our expectations. Other income came in a bit higher on both yoy as well as qoq basis, while depreciation expenses remained stable at Rs459 mn, and tax moved up a bit to 31%. Adj. PAT increased by 5.2% yoy and 2.9% qoq to Rs 8.61 bn in line with our expectation of Rs 8.53 bn. Reported PAT came at Rs 9.04 bn.

Outlook and valuation

Bajaj's domestic sales may find it difficult to improve volumes/market share despite new launches. Concerns of cannibalization within the same brand of Discover may not help a strong growth to arise. With continuation of a weak operational domestic environment, we expect a subdued performance from motorcycles going forward. Fresh concerns have arrived in the form of 3W sales slump in Q3 which may recover soon provided permits are not further delayed too much. Exports markets other than Nigeria and Sri Lanka are showing a strong traction. Egypt is currently showing strong signs of improvement though it is still away from a complete recovery. We do not expect great benefits for the company from rupee weakness as the currency is showing some resistance. Also marketing spend associated with the new launches of the low margin Discover models may drag the margins downwards. However, expectations of higher 3W sales in FY15E due to permit opening and higher exports may support the margins upto some extent in FY 15E. We have cut our estimates on volumes as well as margins for FY14E/15E leading us to continue with our Underperformer rating on the stock. We cut the target price now to Rs 1,830. We observe a 5% downside from current level.

Source : Equity Bulls

Keywords