Bajaj Auto (Q4 FY12)

CMP Rs1,573, Target Rs1,789, Upside 13.7% 

• Total volumes for Q4 FY12 increased 7.3% yoy, led by 26% yoy surge in export volumes
• Blended realizations were lower by 3% yoy on account of adverse product mix
• OPM at 19.8% was higher by 41bps yoy and 5bps qoq on the back of lower raw material costs as a percentage of sales
• Net profit at Rs7.7bn was lower than our expectations
• Margins could be under pressure going ahead considering the new duty drawback rates are lower than the previous DEPB rates
• We maintain our BUY with a revised 9-month price target of Rs1,789

Revenues lower than expectations

Bajaj Auto Ltd (BAL) reported a 12.2% yoy rise in revenues, on the back of a 7.3% yoy volume growth but was lower than expectations due to fall in realizations. On a sequential basis, volumes were lower by 5.4% while realizations were also lower by 6.7%. Fall in realizations was on the back of adverse product mix and qoq appreciation in Rupee against the US Dollar. In terms of volumes, growth was led by 26% yoy surge in exports, owing to 27.9% jump in two wheeler and 18.2% surge in three wheeler exports. In the domestic market, two wheeler volumes remained flat while three wheeler volumes declined 3.4% yoy.

Operating margins in line with expectations

During Q4 FY12, BAL recorded an OPM of 19.8%, a rise of 41bps yoy and 5bps sequentially. Operating profit per vehicle increased 6.8% yoy but declined 1.1% sequentially. Raw material cost including purchases as a percentage of sales was lower by 61bps yoy and 26bps qoq. The gains were primarily on account of favorable currency movements.

BAL reported a PAT of Rs7,720mn, lower than our expectations of Rs7,868mn. While the other income was lower by 10.7% yoy, depreciation was higher by 44.5% yoy. The company reported a foreign exchange gain of Rs203mn, on the back of reversal of MTM loss of the previous quarter.

Maintain BUY with a revised 9-month price target of 1,789

Post a weak domestic volume performance in Q4 FY12, the streets have started factoring in a major slowdown in two-wheeler demand. Nevertheless, we feel, the two-wheeler demand is likely to see a growth of 10-12% over the next couple of years. This would be driven by deeper rural penetration and continued robust growth in exports. Margins are expected to remain above 19.5% in the next couple of years. We maintain our BUY rating with a revised price target of Rs1,789.