Bajaj Auto (Q1 FY13)

CMP Rs1,549, Target Rs1,747, Upside 13.0% 

• Total volumes were up by 6.1% qoq and 1.3% down on yoy basis. The sequential volume growth was led by motorcycle exports, which zoomed up by 30% qoq.

• Domestic volumes were flattish both on yoy and qoq basis.

• Blended realizations were down by 1.4% qoq on account of an adverse product mix with the high margin three wheelers sales taking sharp hits. The net sales for the quarter were Rs48.6bn, marginally up by 3.4% on yoy basis.

• The OPM at 17.9%, was almost flat on a yoy basis, while it declined by 188 bps qoq.

• Recently, price cuts (5-15%) have been taken in Sri-Lanka while price hikes (Rs 500-1500 on 2W/3W) have been taken in domestic markets.

• We maintain our BUY with a revised 9-month price target of Rs1,747

Result table

Source: Company, India Infoline Research

Motorcycles lead growth in exports, domestic volumes flat
Despite the recent disruptions in exports owing to adverse situations in markets of Egypt and Sri Lanka, BAL managed to grow its exports by 19.6% sequentially over Q4FY12 on back of a robust growth in two wheeler volumes. The two wheeler exports grew by 29.7% on qoq basis and 7.1% on yoy basis. While motorcycles exports surged, three wheeler exports declined by 41% yoy and 22.8% qoq. On the domestic front, the volumes were observed to be flat on a yoy basis, and a marginal decline of 1% was seen on qoq basis. 

Operational performance

Source: Company, India Infoline Research

Realizations decline sequentially.. Adverse product mix
The blended realizations declined by 1.4% on a sequential basis on back of an adverse product mix both in domestic and export markets. In the domestic markets, mix changed in favour of the 75-125cc category as the 75-125cc category registered 19% qoq growth as against a fall of 13.4% qoq for 125-250cc. Resultantly, the mix (75-125cc:125-250cc) unfavourably changed to 50:50 in the quarter from 42:58 in Q4FY12. Going forward, we expect improvement in the mix on back of the recent refreshed launches of Pulsar and Discover. Moreover, a price hike taken on July 14 (Rs 500 in 2W; Rs 500-1500 in 3W) is expected to help BAL on realizations front. On the exports side, after the price cuts the volumes of the high margin 3W exports are expected to pick up and support realizations from here.

Cost analysis

Source: Company, India Infoline Research

Operating margins marginally below our expectations
As per reported accounts, OPM remained flat at 17.9%. However, including hedging gains/losses OPM was at 19.4% as against our expectation of 19.6%. The raw material costs were lower by 174 bps yoy, while the other overheads were up by 122 bps yoy, thereby offsetting the benefit in OPM. The other expenses constituted the hedging losses (Rs1.7bn) made in a scenario wherein the exports tanked in the quarter leaving the company over-hedged. The staff costs came in higher on account of an annual ~12% increment.

PAT lower than our estimates on account of higher tax rate
BAL reported a PAT of Rs7,184mn, lower than our expectations of Rs7,408mn. It was mainly on account of the higher tax rate observed in the quarter, due to the reduction in tax benefit at Pantnagar from 100% to 30% (effective FY13). The tax rate for the quarter was recorded at 29.5%, which was a sharp 405bps higher than the tax rate in Q4 FY12.

Sri-Lankan exports to stabilize at new normal levels
Sri Lanka accounts for more than 20% of the export volumes for BAL and ~7% of its total volumes. In terms of revenues, the market contributes ~23-24% owing to higher mix of three-wheelers. Prior to April 2012 (Sri Lankan government raised import duties on 2Ws and 3Ws) BAL was exporting about 10,000 3Ws and 12,000 2Ws. Following the custom duty hikes, the volumes for both 2W and 3W plummeted in the country as BAL implemented commensurate price hikes of close to 30%. However, recently BAL reduced the prices, which led to lower impact of taxes. Furthermore, dealers also took a cut in their margins. Resultantly, as per the management, prices are back to the pre-custom duty hike levels. Of late, the retail volumes have started picking up and the billing volumes can be expected to stabilize at levels of ~8,000 3Ws and 10,000 2Ws by August 2012.

Maintain BUY with a revised 9-month price target of 1,747
Post flat domestic volume performance in Q1 FY13, we believe the uptick in volumes in domestic markets for BAL will be on back of the recent refreshed launches of Pulsar and Discover in the higher cc category (Pulsar 200 NS, Discover 125 ST). With price cuts already being taken to support the volumes in Sri-Lanka, we expect three wheeler export volumes to stabilize at new normal levels. In domestic markets the recent price hikes are also expected to support the realizations. We maintain our BUY rating with a revised price target of Rs1,747.

Financial summary

Source: Company, India Infoline Research, * EPS calculated on pre-exceptional PAT