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Macquarie Sec reiterates `Underperform` on Bajaj Auto
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smart profit
May 1, 2012, 2:53:51 PM5/1/12
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Macquarie Sec reiterates `Underperform` on Bajaj Auto
Macquarie Securities has reiterated `Underperform` on Bajaj Auto with
a price target of 1,430 as against the current market price (CMP) of
1,732.05 in its report dated Apr. 20, 2012. The broking house gave the
following rationale: We have revised downward our volume growth
assumption for Bajaj`s domestic as well as export business. We believe
the company faces a serious growth challenge in the domestic
motorcycle industry, given rising competitive intensity and a demand
slowdown. Headwinds for exports to Sri Lanka (35% of 3W and 10% of 2W
exports) in the form of a sharp increase in import duty, and rising
competition in Africa, are also likely to weigh on Bajaj`s export
growth. We reiterate our contrarian Underperform. Impact: Sharp
deceleration in domestic motorcycle volumes. We expect Bajaj`s
domestic 2W volumes to grow 1% in FY13E compared to industry growth of
6.5%. This slowdown would be due to a likely decline in volume sales
of the Discover after HMSI`s entry into the executive segment (Dream
Yuga), as we believe Discover is a weaker brand than HMCL`s Splendor
or Passion. Further, we think the weak demand outlook of the premium
segment, in which Bajaj has a strong brand in Pulsar, would also weigh
on growth. Performance of new launches holds the key. Bajaj has
recently launched a new premium segment bike, Duke 200 (from KTM). It
also plans to launch the new Pulsar 200 (based on a KTM engine) and
upgrade the Discover, to stem volume declines in its two biggest
brands. We think performance of new models is the key for Bajaj, as
the Discover which accounts for 50% of Bajaj`s domestic unit sales
faces a decline. Export growth likely to moderate sharply. We believe
the large increase in import duty on 2Ws and 3Ws in Sri Lanka and
rising competition from Honda in Nigeria will moderate export growth
in FY13E. Bajaj`s 2W and 3W export sales grew 2x and 1.7x,
respectively, in two years (FY10-12). We think our 2W and 3W export
growth assumption of 14% and 12% for FY213E have downside risk, given
the headwinds in Bajaj’s key export markets.Guidance of 20% EBITDA
margin is too optimistic. We believe Bajaj is struggling to reverse
volume decline in its high-margin premium bike Pulsar, due to weak
demand in the premium segment. Higher growth of the Platina compared
to Pulsar and Discover, along with slowdown in 3W exports to SriLanka,
will also likely impact margins. Higher advertising and promotion
spends due to a weak demand environment would also impact margins. We
expect Bajaj`s EBITDA margin to come down by 60bp to 19.5% in FY13E
with more downside risks than upside. Valuation: Underperform
maintained: BJAUT is trading at FY13E PER of 15.7x, which is a 22%
premium to its historical valuation. With downside risk to volume
amidst rising competition, we expect valuations to revert towards the
mean.Click here to view full report http://breport.myiris.com/MACQUARIE/BAJAUT1_20120420.pdfFollow
us on Face bookhttp://www.facebook.com/smartprofit.stocksFollow us on
Twitterhttps://twitter.com/#!/SmartProfit21
Macquarie Securities has reiterated `Underperform` on Bajaj Auto with
a price target of 1,430 as against the current market price (CMP) of
1,732.05 in its report dated Apr. 20, 2012. The broking house gave the
following rationale: We have revised downward our volume growth
assumption for Bajaj`s domestic as well as export business. We believe
the company faces a serious growth challenge in the domestic
motorcycle industry, given rising competitive intensity and a demand
slowdown. Headwinds for exports to Sri Lanka (35% of 3W and 10% of 2W
exports) in the form of a sharp increase in import duty, and rising
competition in Africa, are also likely to weigh on Bajaj`s export
growth. We reiterate our contrarian Underperform. Impact: Sharp
deceleration in domestic motorcycle volumes. We expect Bajaj`s
domestic 2W volumes to grow 1% in FY13E compared to industry growth of
6.5%. This slowdown would be due to a likely decline in volume sales
of the Discover after HMSI`s entry into the executive segment (Dream
Yuga), as we believe Discover is a weaker brand than HMCL`s Splendor
or Passion. Further, we think the weak demand outlook of the premium
segment, in which Bajaj has a strong brand in Pulsar, would also weigh
on growth. Performance of new launches holds the key. Bajaj has
recently launched a new premium segment bike, Duke 200 (from KTM). It
also plans to launch the new Pulsar 200 (based on a KTM engine) and
upgrade the Discover, to stem volume declines in its two biggest
brands. We think performance of new models is the key for Bajaj, as
the Discover which accounts for 50% of Bajaj`s domestic unit sales
faces a decline. Export growth likely to moderate sharply. We believe
the large increase in import duty on 2Ws and 3Ws in Sri Lanka and
rising competition from Honda in Nigeria will moderate export growth
in FY13E. Bajaj`s 2W and 3W export sales grew 2x and 1.7x,
respectively, in two years (FY10-12). We think our 2W and 3W export
growth assumption of 14% and 12% for FY213E have downside risk, given
the headwinds in Bajaj’s key export markets.Guidance of 20% EBITDA
margin is too optimistic. We believe Bajaj is struggling to reverse
volume decline in its high-margin premium bike Pulsar, due to weak
demand in the premium segment. Higher growth of the Platina compared
to Pulsar and Discover, along with slowdown in 3W exports to SriLanka,
will also likely impact margins. Higher advertising and promotion
spends due to a weak demand environment would also impact margins. We
expect Bajaj`s EBITDA margin to come down by 60bp to 19.5% in FY13E
with more downside risks than upside. Valuation: Underperform
maintained: BJAUT is trading at FY13E PER of 15.7x, which is a 22%
premium to its historical valuation. With downside risk to volume
amidst rising competition, we expect valuations to revert towards the
mean.Click here to view full report http://breport.myiris.com/MACQUARIE/BAJAUT1_20120420.pdfFollow
us on Face bookhttp://www.facebook.com/smartprofit.stocksFollow us on
Twitterhttps://twitter.com/#!/SmartProfit21
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