Bajaj Auto Limited - Q3FY14 Update, CMP Rs.1945, Maintain HOLD, Revised Target of Rs.2235 - Sushil Finance

Bajaj Auto Limited (BAL) registered Q3FY14 results which were below our expectations due to 12% YoY decline in volume. Some of the key highlights of the result are as follows:

Key Highlights of Q3FY14

During Q3FY14, BAL's Net sales stood at Rs. 50248 mn, a de-growth of 5.3% YoY. On the Volume front, the company saw a dip of 11.9% YoY to 993690 units in Q3FY14. Export revenues grew 23.5% while domestic revenues declined 19.1% YoY. On average realizations front, BAL registered a growth of ~7% YoY & a de-growth of ~4% QoQ reflecting adverse product mix with the domestic business witnessing lower 3W and lower premium motorcycles share whereas the exports markets witnessed a decline in realization on the back of lower 3W mix. Rs/$ realizations stood at 60.9 flat QoQ with it expected to be at Rs. 60 for FY14.

On the volume front, the management indicated that demand during the festive season did not recover as expected with retail sales being a bit dry post Diwali. The company has however maintained its market share in Platina & Pulsar series whereas it has lost market share in Discover series, which it is confident of regaining with the 100M & 125M. The company which is currently doing discover sales of around 80k/month expects it to increase to 110k units by Mar 14 &120-125k/month by June 14 thereby inducing confidence of registering sequential growth in Q4FY14. On the 3W front, Sluggish domestic sales was a surprise for the company, however with new permits opening up in Maharashtra in march & 50k permits in Delhi under contention would see sales picking up in the domestic space. BAL has also seen strong replacement 3W demand (1200/month in Mumbai). RE60 launch is expected by early Q2FY15 and is expected to be addition to 3Ws (current capacity at 60k/p.a). On the exports front, Nigeria/Africa sales are picking up due to price rationalizations taken in Oct 13 amidst currency benefit & affordability concerns in the market. Egypt is also witnessing reasonable improvement from Indian banks to open LCs with their risk appetite increasing (still some way of its previous monthly run rate of 7k 3W and 5-6k 2W). Kawasaki JV in Indonesia is also doing well with the company selling around 6k units in 9MFY14 with expectations of it reaching 9k for FY14 & 25-30k in FY15E. However, Srilanka 3W exports continues to struggle on the back of declining relationship & economy not doing well with it currently selling only 50% of previous run rate of 10k/month.

During the quarter, EBIDTA came in at Rs. 11351.8 mn registering a YoY growth of 12.2% with EBIDTA margins at 22.1% v/s 18.7% in Q3FY13 & 21.9% in Q2FY14. The company also booked a notional MTM gain of Rs. 955 mn (Fx reversal). Adjusted for this, EBIDTA margin was at 21.1%. Q3FY14 margins were impacted by product upgrade in 3W without passing on the cost increase (Rs. 6k/unit) to customers, price corrections taken in some African markets & inferior product mix. However in Jan 15, the company has passed on Rs. 2k/unit to its 3W customers and expects to pass on the remaining in a phased manner.

A 14.5% growth in tax (Tax rate - 31% v/s 30% in Q3FY13) restricted PAT to Rs. 9045 mn, a growth of 10.5% YoY & 8% QoQ. Its adjusted PAT – excluding notional MTM forex gain of Rs. 955 mn – rose 2% YoY (down 3% QoQ) to Rs. 8386mn.

OUTLOOK & VALUATION

BAL expects strong bounce back in its market share on account of new launches in domestic market (100M Launched in Oct 13 & 125M expected in Mar 14) coupled with increasing optimism in the domestic 3W space with opening up of new permits in Maharashtra & Delhi. On the export front; 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. However, we believe sequential margins could be under pressure with no major improvement expected in Rs/$ realization & a full impact of new Discover launches in Q4FY14. We have however downward revised our volume & EBITDA estimates for FY14E citing later than expected revival in the domestic market. FY15E more or less remains the same with marginal uptick in EBITDA margins compensated by volume growth over a lower base. We continue to recommend a HOLD on the stock with a TP of Rs.2235 (17x FY15E EPS) with a lot depending on the success of new discover series and regaining lost domestic market share for further earnings upgrade.

Source : Equity Bulls

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