Please refer to important disclosures at the end of this report 1 Y/E March (` cr) 1QFY12 1QFY11 % chg (yoy) Angel est. % diff Net sales 4,777 3,890 22.8 4,913 (2.8) EBITDA 911 777 17.2 972 (6.3) EBITDA margin (%) 19.1 20.0 (91)bp 19.8 (71)bp Reported PAT 711 590 20.5 734 (3.1) Source: Company, Angel Research Bajaj Auto (BAL) reported marginally lower-than-expected results as the company’s performance during 1QFY2012 was negatively impacted by a 1.8% qoq drop in average net realisation despite price hikes and margin contraction of 145bp due to raw-material cost pressures. We revise our FY2012 and FY2013 earnings estimates downward by 4% and 8%, respectively, to factor in the replacement of DEPB scheme by a duty drawback scheme post September 2011. We maintain our Accumulate recommendation on the stock. Net sales driven by volume growth; profitability impacted by cost pressures: BAL reported slightly lower-than-expected top-line growth of 22.8% yoy (13.7% qoq) to `4,777cr, driven by a 17.7% yoy (15.3% qoq) jump in volumes. The variance was due to lower average net realisation, which declined by 1.8% qoq despite average price hikes of ~2% during the quarter. Two-wheeler sales grew by 16.3% yoy, with Pulsar and Discover contributing ~65% of sales. EBITDA margin came in 71bp below our estimate at 19.1%, registering a fall of 91bp yoy (145bp qoq). This was a result of higher raw-material costs, which increased by 150bp yoy (210bp qoq). This was the first time in the last eight quarters when the company’s margin came in below the 20% mark. As a result, net profit came in lower than expected at `711cr, registering growth of 20.5% yoy (5.2% qoq). Outlook and valuation: We factor in the replacement of DEPB scheme by a duty drawback scheme post September 2011, which will result in export incentives of 1% as compared to 9% under the DEPB scheme. Hence, we expect a ~175bp contraction in operating margins and a ~8% decline in earnings. At `1,431, the stock is trading at 14.2x FY2013E earnings. We maintain our Accumulate view on the stock with a target price of `1,512, valuing it at 15x FY2013E earnings. Key financials Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E Net sales 11,921 16,609 19,717 22,544 % chg 35.3 39.3 18.7 14.3 Adj. net profit 1,784 2,750 2,800 2,918 % chg 132.0 54.1 1.8 4.2 EBITDA margin (%) 20.2 19.7 18.6 17.6 Adj. EPS (`) 61.7 95.0 96.8 100.8 P/E (x) 24.3 15.1 14.8 14.2 P/BV (x) 14.1 8.4 6.9 5.6 RoE (%) 74.4 70.2 51.3 43.5 RoCE (%) 58.8 66.2 61.6 54.9 EV/Sales (x) 3.2 2.1 1.7 1.4 EV/EBITDA (x) 16.1 11.1 9.6 8.5 Source: Company, Angel Research ACCUMULATE CMP `1,431 Target Price `1,512 Investment Period 12 Months Stock Info Sector Bloomberg Code BJAUT@IN Shareholding Pattern (%) Promoters 50.0 MF / Banks / Indian Fls 16.8 FII / NRIs / OCBs 16.3 Indian Public / Others 16.9 Abs. (%) 3m 1yr 3yr Sensex (5.5) 3.8 39.7 Bajaj Auto 2.4 17.1 471.0 Face Value (Rs) BSE Sensex Nifty Reuters Code 10 18,618 5,600 BAJA.BO Automobile Avg. Daily Volume Market Cap (Rs cr) Beta 52 Week High / Low 41,406 0.7 1,665/1,190 67,322 Yaresh Kothari 022-3935 7800 Ext: 6844 [email protected]Bajaj Auto Performance Highlights 1QFY2012 Result Update | Automobile July 14, 2011
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Please refer to important disclosures at the end of this report 1
Y/E March (` cr) 1QFY12 1QFY11 % chg (yoy) Angel est. % diff
Net sales 4,777 3,890 22.8 4,913 (2.8)
EBITDA 911 777 17.2 972 (6.3)
EBITDA margin (%) 19.1 20.0 (91)bp 19.8 (71)bp
Reported PAT 711 590 20.5 734 (3.1)
Source: Company, Angel Research
Bajaj Auto (BAL) reported marginally lower-than-expected results as the company’s performance during 1QFY2012 was negatively impacted by a 1.8% qoq drop in average net realisation despite price hikes and margin contraction of 145bp due to raw-material cost pressures. We revise our FY2012 and FY2013 earnings estimates downward by 4% and 8%, respectively, to factor in the replacement of DEPB scheme by a duty drawback scheme post September 2011. We maintain our Accumulate recommendation on the stock.
Net sales driven by volume growth; profitability impacted by cost pressures: BAL reported slightly lower-than-expected top-line growth of 22.8% yoy (13.7% qoq) to `4,777cr, driven by a 17.7% yoy (15.3% qoq) jump in volumes. The variance was due to lower average net realisation, which declined by 1.8% qoq despite average price hikes of ~2% during the quarter. Two-wheeler sales grew by 16.3% yoy, with Pulsar and Discover contributing ~65% of sales. EBITDA margin came in 71bp below our estimate at 19.1%, registering a fall of 91bp yoy (145bp qoq). This was a result of higher raw-material costs, which increased by 150bp yoy (210bp qoq). This was the first time in the last eight quarters when the company’s margin came in below the 20% mark. As a result, net profit came in lower than expected at `711cr, registering growth of 20.5% yoy (5.2% qoq).
Outlook and valuation: We factor in the replacement of DEPB scheme by a duty drawback scheme post September 2011, which will result in export incentives of 1% as compared to 9% under the DEPB scheme. Hence, we expect a ~175bp contraction in operating margins and a ~8% decline in earnings. At `1,431, the stock is trading at 14.2x FY2013E earnings. We maintain our Accumulate view on the stock with a target price of `1,512, valuing it at 15x FY2013E earnings.
Key financials Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E
Marginally lower-than-expected top-line performance: BAL reported slightly lower-than-expected top-line growth of 22.8% yoy (13.7% qoq) to `4,777cr, driven by a 17.7% yoy (15.3% qoq) jump in volumes. The variance in growth was due to lower average net realisation, which declined by 1.8% qoq despite average price hikes of ~2% during the quarter. On a yoy basis, however, average net realisations grew by 4.3% to `41,973. Motorcycle sales grew by 16.3% yoy with Pulsar and Discover contributing ~65% of sales, while three-wheelers registered strong 29.9% yoy growth. BAL’s exports continued to see strong traction and posted ~40% yoy revenue growth during to `1,688cr, owing to a 31.9% yoy increase in volumes. Other operating income also posted robust 24.6% yoy growth to `190cr, aiding the top-line performance.
The company’s domestic motorcycle sales grew by 10% (underperforming the industry growth of 17.4%) in 1QFY2012, while domestic three-wheeler sales increased by 11.3% yoy (against 4.9% industry growth). As a result of the underperformance in the domestic motorcycle segment, the company’s market share declined by 80bp qoq to 25.3% in 1QFY2012 from 26.1% in 4QFY2011. On the exports front, demand remained robust as motorcycle and three-wheeler volumes recorded robust 29.7% and 41.4% yoy growth, respectively, in 1QFY2012.
Exhibit 3: Sales growth driven by volume and realisation
Source: Company, Angel Research; Note: Net sales excludes other
operating income
Exhibit 4: Domestic market share across categories
Source: Company, SIAM, Angel Research
Operating performance hit by raw-material cost pressures: During 1QFY2012, EBITDA margin came in 71bp below our estimate at 19.1%, registering a fall of 91bp yoy (145bp qoq). This was the first time in the last eight quarters when the company’s margin came in below the 20% mark, primarily on account of a 150bp yoy (210bp qoq) increase in raw-material cost, which accounted for 71.7% of net sales during the quarter. However, lower staff cost and other expenditure coupled with price hikes undertaken to pass on input costs helped arrest further margin erosion. Overall, operating profit during the quarter witnessed 17.2% yoy (5.7% qoq) growth to `911cr.
Exhibit 5: EBITDA margin contracts on cost pressures
Source: Company, Angel Research; Note: Net sales excludes other
operating income
Exhibit 6: Net profit up 20.5% yoy
Source: Company, Angel Research; Note: Net sales excludes other
operating income
Net profit up 20.5% yoy on higher other income: BAL reported marginally lower-than-expected net profit growth of 20.5% yoy (5.2% qoq) to `711cr vs. our estimate of `734cr, largely due to lower-than-expected operating performance. Further, the bottom-line performance was aided by lower-than-expected tax outgo.
19.5 22.0 22.0 22.9 20.0 20.7 20.3 20.5 19.1
68.5 68.5 71.3 71.6 74.1 73.5 74.0 73.5 75.6
0 10 20 30 40 50 60 70 80
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
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3QFY
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4QFY
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1QFY
12
(%) EBITDA margin Raw material cost/sales
13.0 14.4 15.0
16.1 15.8 16.3 16.6 16.7 15.5
0 2 4 6 8 10 12 14 16 18
0
100
200
300
400
500
600
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1QFY
10
2QFY
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3QFY
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(%)(` cr) Net profit (LHS) Net profit margin (RHS)
Bajaj Auto | 1QFY2012 Result Update
July 14, 2011 5
Investment arguments
Focus on Discover and Pulsar to improve market share: BAL continues to witness strong demand in the two-wheeler segment from its strong dual offering of Discover and Pulsar. The successful launch of Discover 100cc and 125cc bike has helped BAL maintain its market share of ~25% in the domestic motorcycle market. Further, the launch of the new Pulsar is expected to help BAL retain its strong volume momentum. The company is positioning itself in-line with its strategy of ‘value and price products', wherein it proposes to tap the higher-value bike segments, which have a high-growth potential and fetch better realisations. BAL has also launched new products in the high-margin 125cc+ segment.
Three-wheeler registering healthy growth: BAL has a strong presence in the three-wheeler market, with an overall market share (including exports) of ~61% in June 2011. The company tops the passenger auto-rickshaw segment (65.7% market share), which accounts for ~87% of the three-wheeler market. The three-wheeler segment fetches higher margins than the company’s two-wheeler business. Although competition in the domestic three-wheeler space is intense, strong export volume growth has helped BAL post higher volumes. As a result, we expect the company’s three-wheeler volumes to grow by 12–13% over FY2011–13E.
High growth potential in export volumes: BAL registered strong exports CAGR of ~35% during FY2006–11, aided by a ~40% CAGR in two-wheeler exports and a ~25% CAGR in three-wheeler exports. Going ahead, we estimate BAL to register a ~20% CAGR over FY2011–13E, driven by the strong demand outlook from the exports market. BAL has hedged 90–93% of its FY2012 exports at a USD–INR rate of `47. Hence, any sharp appreciation of the INR in FY2012 will not have a significant impact on the company’s margins.
Outlook and valuation
We factor in the replacement of DEPB scheme by a duty drawback scheme post September 2011, which will result in export incentives of 1% as compared to 9% under the DEPB scheme. Hence, we expect a ~175bp contraction in operating margins and a ~8% decline in earnings. At `1,431, the stock is trading at 14.2x FY2013E earnings. We maintain our Accumulate recommendation on the stock with a target price of `1,512, valuing it at 15x FY2013E earnings. Exhibit 7: Change in estimates
Y/E March Earlier estimates Revised estimates % chg
FY2012E FY2013E FY2012E FY2013E FY2012E FY2013E
Net sales (` cr) 19,654 22,380 19,717 22,544 0.3 0.7
Source: Angel Research; Note: Net sales includes other operating income
Key risks: Any increase in exports incentives from the current levels of 1% under the duty drawback scheme post September 2011 poses an upside risk to our target price. Further, pricing action by the company as indicated by the management to mitigate the impact of withdrawal of the DEPB scheme on margins will lead to revision in our earnings estimates and target price.
Bajaj Auto | 1QFY2012 Result Update
July 14, 2011 6
Exhibit 8: Key assumptions
Y/E March FY2009 FY2010 FY2011 FY2012E FY2013E
Total volume (units) 2,194,111 2,851,518 3,823,954 4,430,352 5,057,818
1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)
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