ICICI SECURITIES REPORT ON STRUGGLING BAJAJ AUTO

[smart profit]

ICICI SECURITIES REPORT ON STRUGGLING
BAJAJ AUTO

Not thrilled! Core growth remains fragile…
Bajaj Auto (BAL) reported its Q3FY12 numbers with sales coming in
above our estimate at | 5,063.2 crore (I-direct estimate: | 4,967.9
crore) a 21.2% YoY jump. It was driven by a mix of volume growth (up
13.6%YoY) at 1.07 million units and higher realisation/unit (up 5.0%
YoY) to |47,276. BAL had hiked prices ~3.5% to offset the DEPB impact
coupled with benefits arising from a depreciating rupee as average USD
rate for the quarter was higher 3.3% QoQ at | 49.4. RM cost as
proportion to sales declined 103 bps QoQ as EBITDA margins got
enhanced to 21.0% (up ~90 bps QoQ). Reported PAT was ahead of our
estimates at ~| 795.2 crore (I-direct estimate: | 788.0 crore), a jump
of 19.2% YoY. However,we will analyse beyond these numbers further in
the report
Bajaj Auto’s overall volume growth of 13.6% YoY was led by three
wheeler growth of 18.8% YoY and motorcycle volume growth of 12.9% YoY.
Although the export volume growth is robust at 28.4% YoY, we remain
cautious on the domestic growth front as early signs of an industry
wide slowdown have started creeping in. The weak domestic market
performance is reflected in a QoQ dip of 7.6% with overall domestic
sales in December sliding below the 2 lakh unit mark for the first
time in FY12. Bajaj Auto had previously undertaken a price hike across
its export segment to cover the impact of DEPB. The recently launched
Boxer-150 cc has not met expectations with BAL looking at
repositioning the same. The management expects Q4FY12 industry growth
to slide down to ~5-6% and does not expect a “V-shaped” rebound for
the same in FY13 in line with our bearish stance for the segment.
Valuation
We believe BAL’s domestic volume growth is under serious threat as
witnessed in the last couple of months and exports have been the only
shining light. On exports also, we believe competition from Honda and
Hero MotoCorp would be stiff. Any appreciation of the rupee could
impact our estimates negatively. At the CMP of | 1,561, the stock is
trading at 13.7x FY13E EPS. We have valued the stock at 13.9x FY13E
EPS to arrive at a target price | 1,460. We maintain our HOLD rating
on BAL.
Segmental analysis
Two wheeler segment on dangerous terrain Bajaj Auto’s motorcycle
segment or the core business has started to show varied signs of
stress. The overall volume growth in Q3FY12 looks decent
superficially at ~13% YoY at 0.95 million units. Volumes have been
driven by higher export sales (rising ~27% YoY) to 3 lakh units,
contribution rising ~353 bps YoY to ~32.1% of total motorcycles. As
elucidated in the charts below, the domestic growth on a longer term
basis has been weakest in the two-wheeler space for BAL. The
management shares our pessimism towards two-wheeler industry growth
and expects only ~5-6% growth in Q4FY12. Also, no sudden recovery in
growth in FY13 also looks in sight. On product launches, the Boxer-150
cc, which was launched with “Bharat” or rural India in mind, has been
below expectations as per the management with repositioning of the
same is expected. BAL is also expected to launch two new products in
FY13 of which the new “Pulsar”would be keenly watched.
On the exports front also, though the management remains bullish on
repeating historical growth numbers we believe impediments to growth
in the key market of Africa (~45% of total exports) with de-regulation
in petrol prices in country like Nigeria (accounts for ~60% of African
sales) could hurt the buying fervour. Also, another problem brewing
for BAL is the aggressive export expansion plans of Hero MotoCorp.
HMSI can very well provide a challenge in the underdeveloped African
markets, which may be relatively price sensitive with similar quality
products. There have been talks of a Honda 100 cc product, which could
witness a sub-| 35,000 price tag in both exports and domestic market.
This could be the first trigger for divergence for the ongoing
“pricing discipline” followed in the industry by domestic players as
MNC players start to chase market share.


Hero MotoCorp continued to maintain its stronghold in the executive
motorcycle segment by gaining market share to the tune of 395 bps on a
sequential basis to 74.1%. Bajaj Auto and TVS lost market share of 340
bps and 55 bps MoM, respectively
Bajaj Auto lost ground to its competitors in the premium segment with
market share sliding 321 bps MoM. Hero MotoCorp and TVS witnessed
market share expansion of 234 bps and 87 bps, respectively

Three wheelers comforts but for how long? The three-wheeler segment is
again a similar story with a different flavour. The overall growth in
terms of volumes has been healthy at ~19% at 1.3 lakh units. However,
again the non-existent domestic growth is turning out to be a concern
even as exports remain strong (refer Exhibit: 2) .The domestic
slowdown has been due to lack of any fresh issuances in licenses for
the segment. The potential for growth in exports in the focused
markets remains high. We expect better growth in terms of exports of
three-wheelers rather than motorcycles. The newly launched “RE-60”
branded as a “four wheeler and not a car” would have to go through a
series of regulatory clearances from RTO and state transport
departments at various levels to be categorised as an alternative to
public transportation on three-wheels. This may be asignificant
challenge as government inaction remains high in even moregrave areas
and such clearances may take longer to fructify than themarket
expects. However, on a segmental level we continue to believe three-
wheelers with its 30% plus margins would provide a decent buffer for
BAL.
BAL’s margin rise to 21% has been strongly aided by currency
depreciation and improving export realisations. However, with INR
showing some early signs of strength such a trend could swiftly
reverse
BAL has faced pressures in the domestic market with lesser Pulsar
sales (above 125 cc). However, exports have benefited the overall
growth in average selling price (ASPs). Costs also have been hurt due
to the currency impact and are expected to normalise in FY13E
The in-house raw material index reflects the combination of various
input materials (steel,rubber aluminium, plastics) for OEMs, which
have been rebased with February 2009 as base year 100. The chart shows
the increasing trend in raw material prices causing concern for the
industry.

Outlook & Valuation
The domestic two-wheeler industry has been a strong benefactor of
latent demand for FY07-09. This, we believe, has got extinguished to a
large extent. Going ahead, on a large base, incremental growth in the
motorcycle business would be a challenge. The scooters segment, which
has shown strong growth lately, has been due to the rise of a “new
target audience” in terms of female working women and young kids that
cannot be catered to by the motorcycle segment. Thus, we anticipate
relatively better growth prospects in the short-term for this sub-
segment. Overall, the industry is expected to grow at ~11-13% in
FY13E with unlisted players (MNCs) gaining and listed players lagging
behind. We would also expect BAL to struggle to hold on to the growth
premium with worsening domestic growth and higher competition in the
African market.
BAL’s domestic volume growth is under serious threat as witnessed in
last couple of months and exports have been the only shining light. On
exports also, we believe competition from Honda and Hero Moto would be
stiff. Any appreciation of the rupee could impact our estimates
negatively. Thus, BAL could struggle to keep hold of the “growth
premium” with PEG hovering at 1.7x FY13E. At the CMP of | 1,561, the
stock is trading at 13.7x FY13E EPS. We have valued the stock at 13.9x
(discount to HMCL ) FY13E EPS to arrive at a target price Rs 1,460.
The discount can be attributed to our belief that BAL faces serious
growth risks on both the domestic and exports front. We maintain our
HOLD ratiing on BAL with a downside of 6% on the stock.
For Full Report please click on below link
http://www.smartprofit.in/MediaFiles/ICICIdirect_BajajAuto_Q3FY12.pdf