Accumulate Bajaj Auto - Elara Capital

• Bajaj Auto
• Rating : Accumulate
• Target Price : INR 2,701
• Upside : 7%
• CMP : INR 2,526 (as on 26 July 2010)

On a faster track

Volumes momentum remains strong; upgrading growth estimates

Bajaj Auto (BAL) maintained its aggressive volume guidance of 4mn units for FY11 despite the marginal decline in domestic monthly run-rate in the current quarter (which was largely due to production constraints). Taking a cue from management's conviction and our interactions with dealers we upgrade our FY11 growth estimates for 2Ws and 3Ws to 32% and 17% (from 23% and 15% earlier), respectively. The company has hedged almost all of its exports (90% through forwards and balance through natural hedge) at INR/USD of 47, which gives us a comfort on realisations and margins.

Subdued EBITDA margins due to higher input, staff costs

BAL's Q1FY10 EBITDA margins at 20% were below our expectations as the company locked in price contracts at higher rates at the beginning of the quarter when the prices of key input items were at their recent peak. The prices have softened since then and the company has renegotiated price contracts at lower rates for the current quarter. The company expects the margins to improve in a short term, however we remain cautious on margins from a long term perspective given the uncertainties in input price movements. We have revised our margin assumptions downward by 80 bps each for FY11E and FY12E.

Rise in investment book, yields thereon boosts other income

Robust operational cash flows and efficient management of working capital has taken the company's investment book close to INR 37bn from INR 18bn at the beginning of FY10. We upgrade yield estimates to INR 2.5bn from INR 1.8bn currently.

Outlook and valuation; maintain our positive stance

With upward revisions in volume growth estimates and treasury income, our revised EPS estimates now stand at INR 157 and INR 168, for FY11E and FY12E, respectively. Given the strong earnings CAGR, company's primary focus on profitability and likely upside from its four wheeler venture, we believe, the company deserves to trade at industry's premium valuations. We maintain our 'ACCUMULATE' ratings on the stock with a revised price target of INR 2,700.

Source : Equity Bulls

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