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Accumulate Bajaj Auto - Volume bikes - Elara Capital
Posted On : 2010-10-29 20:41:21( TIMEZONE : IST )
- Bajaj Auto
- Rating : Accumulate
- Target Price : INR1,590
- Upside : 7%
- CMP : INR1,485 (as on 20 October 2010)
Strong volume momentum; upgrading estimates
Unlike in the past, Bajaj Auto (BAL) has met the its volume estimates of new model launches (Discover 100 cc and 150cc) and maintained its overall volume guidance (4 mn units of sales for FY11) for a substantially long period of time. With the current momentum in sales (confirmed by our dealer checks), we expect the company to close in on its 4mn units of guidance by the end FY11. With the better market sentiment and improved auto financing, we expect the industry to grow at 14% in FY12E. We upgrade our volume estimates to 3.9mn units in FY11 and 4.4mn units in FY12.
Low raw material costs aid margins; one-offs in other expenses
As guided, raw material costs were down 50 bps qoq. Other expenses had one-offs on account of subvention costs, transport incentives and loss from the sale of an old aircraft. Adjusted for one-offs (INR 340-350mn), EBITDA margins for the quarter were at 21.5%. Going forward, the pressure on margins from rising input costs would be partially offset by the positive operating leverage (will continue to play on for some more time) and fiscal benefits from Pantnagar plant.
Outlook and valuation; valuing on core earnings
With the substantial rise in stock price in recent times (as a result of significant jump in earnings), we have tried to capture the fair value through the DCF way, making few basic assumption on the long-term growth rate for the two wheeler industry (10-12% CAGR for next five years), taking into account the current penetration levels (from 26 per 100 household today, the industry has a potential to go up to 40) and the company's market share (we expect the company to maintain a market share at 35%). We get INR1,590 as a fair value for the company. The implied P/E multiple at our fair value works out to close to 16x FY12 earnings, which appears reasonable given the current earnings momentum. We maintain our Accumulate rating on the stock with a target price of INR 1,590.
