COMPANY UPDATE Arun Agarwal arun.agarwal@kotak.com +91 22 6621 6143 BAJAJ AUTO LIMITED (BAL) PRICE: RS.1921 RECOMMENDATION: BUY TARGET PRICE: RS.2239 FY15E P/E: 13.7X BAL's performance in the domestic motorcycle industry in FY14 has been weak. However, in January 214, volumes and market share did improve for the company and the management has hinted about further regain of lost market share. Despite ban of 2W and 3W in Egypt, we remain positive about growth in exports. 3W sales in the domestic market over the next few months could receive boost from new permits issuance in Maharashtra. BAL operating margins are expected to largely stay stable and healthy over the medium to long term. We retain BUY with price target of Rs2,239. Summary table (Rs mn) FY13 FY14E FY15E Sales 199,973 24,949 241,276 Growth (%) 2.4 2.5 17.7 EBITDA 36,352 42,86 51,814 EBITDA margin (%) 18.2 2.9 21.5 PBT 42,662 47,889 57,74 Net profit 3,436 33,55 4,485 Adjusted EPS (Rs) 15.2 115.8 139.9 Growth (%) (1.6) 1.1 2.8 CEPS (Rs) 11.8 121.7 146.6 BV (Rs/share) 273 336 423 Dividend / share (Rs) 45. 45. 45. ROE (%) 43.7 38. 36.9 ROCE (%) 6.3 53.9 52.1 Net cash (debt) 55,49 75,489 96,558 NW Capital (Days) (11) (11) (12) P/E (x) 18.3 16.6 13.7 P/BV (x) 7. 5.7 4.5 EV/Sales (x) 2.5 2.3 1.9 EV/EBITDA (x) 13.8 11.2 8.9 Domestic motorcycle growth still subdued 2W demand in the domestic market continues to be largely subdued. In FY14 (YTD), 2W industry volumes have grown by 6%, and the same has largely been aided by 21% growth in scooter volumes. Motorcycle volumes have so far this year is up by 2.6%. Honda Motorcycle India Limited (HMSI) has reported 36% volume growth in FY14 (YTD) as against flat growth by Hero MotoCorp and 16% de-growth by BAL. For Bajaj Auto, FY14 has been a rather difficult year, with the company underperforming the industry. Demand in urban areas has been hit more as compared with the rural counterparts and this is one of the reasons for BAL's volume de-growth. Apart from this, competition from HMSI has become more intense. In FY14 (YTD), BAL has lost 45bps market share in the domestic motorcycle industry. Majority of the market share lost by Bajaj Auto and other incumbents have been gained by Honda Motorcycle and Scooters India Limited (HMSI).HMSI has gained 379bps market share so far in FY14. Bajaj Auto - Domestic Motorcycle Volume and growth Source: Company, Kotak Securities - Private Client Research 25 2 15 1 5 5.. 5. 1. 15. 2. 25. 3. 35. Source - SIAM Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Bajaj Auto - Domestic Motorcycle segment market share 27. 24. 21. 18. 15. Source - SIAM However, the company is hopeful of getting back the lost market share. As per the company, the loss of market share in recent months was due to transition from the old Discover to the new Discover. In the month of January 214, BAL market share in the domestic motorcycle segment improved to 18.2% from the lows of 16.7% in December 214. Further, company's January 214 retail sales were ahead of wholesale volumes. Bajaj Auto is banking on success of Discover 1M coupled with launch of Discover 125, slated for March 214, to come close to earlier market share. We note that, Bajaj Auto is aggressively looking to concentrate on the Discover brand and has accordingly done various new launches under this brand. In our view, there are various reasons for the company's renewed focus on the Discover brand. Firstly, the Discover brand is part of the segment, which accounts for majority share of the overall 2W volumes. Secondly, with Honda Motorcycle getting more aggressive, Bajaj Auto will want to further establish its presence. Thirdly, unlike Pulsar, which is the dominant brand in its segment with significant market share, Discover still has huge opportunity to gain market share. So far, the company's strategy of launching various new models under the Discover brand has not yielded the desired results. While the company may gain some more market share in the short term, but medium to longer term sustainability of market share will depend a lot on demand recovery in urban markets. Exports growing despite disruption in certain geographies Amid weak domestic performance, BAL has received support from growth in exports. While FY14 YTD growth in exports stands at a mere 1%, but growth in the past six months stands at 11%. Exports performance has been plagued by distinct issues in different countries. Despite that, the company has been reporting growth since the past six months and that is a healthy sign in our view. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Bajaj Auto - Rising share of exports in overall mix (%) 44. 39. 34. 29. 24. FY8 FY9 FY1 FY11 FY12 FY13 FY14 (YTD) Source: Company Bajaj Auto - Export volumes and growth 16 3 12 15 8 4 15 3 Source: Company One of the recent setbacks in exports have come in from Egypt, where the interim government there decided to impose a one-year imports' ban on motorcycles and three wheelers. However, the interim government there has resigned since then. For Bajaj Auto, Egypt is one of the key markets with average monthly sales of ~6, three wheelers and ~4, motorcycles. In the past few quarters, Bajaj Auto's dispatches to Egypt were suffering due to political crisis. In recent times, the company was witnessing improvement in Egypt. We spoke with BAL and as per the company, exports to Egypt will be impacted for 3 months and post that the company hopes to sell CKD units. Exports have been a critical part of the company's overall strategy and over the past few years it has gained more prominence. Exports now forms 41% (FY14 YTD) of the overall volumes, up from 26.8% in FY8. We do acknowledge the fact that; poor domestic sales too had a role to play in rising export share for the company. But at the same time, BAL had to face various issues in different countries (Sri Lanka, Egypt, Nigeria). Market share gain in existing markets and entry into new geographies has aided export growth over the years. In Nigeria, 3W exports have increased from ~2, units per month (six months back) to ~6, units in February 214. On exports, company remains largely optimistic on future growth prospects. We expect exports volume growth to continue in FY15. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
We recommend BUY on Bajaj Auto with a price target of Rs.2239 3W demand could see revival in FY15 3W sales have been subdued for the company in FY14 with volumes so far witnessing marginal de-growth. In the domestic market, the demand situation has been quite bleak. In the domestic market, petrol/cng 3W's are largely used for intra city transportation and demand is highly sensitive to new permits. New permits are expected in the state of Andhra Pradesh, Tamil Nadu, Maharashtra and Delhi over the next few months. In fact, Maharashtra recently granted ~8, new permits (through an online lottery system). We expect these new permit issuance to generate 3W demand over the next few months for BAL. Diesel 3W demand is marred by the general slowdown in demand and the recovery in this segment will largely depend on the overall revival in the economy. In exports, 3W sales over the next few months could take some hit due to ban in Egypt. Bajaj Auto - Domestic 3W volumes and growth 2 3. 15 15.. 1 15. 5 3. 45. 6. Source: SIAM Bajaj Auto - Exports 3W volumes and growth 35 3 25 2 15 1 5 Volume (Units) Growth (%) 2. 15. 1. 5.. 5. Source: SIAM Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
Strong operating margins to hold over the medium term For 9MFY14, BAL has reported EBITDA margin of 21.1% which has been strong in a scenario of demand slowdown and volume de-growth. INR depreciation has been one of the key supports to margins in FY14. For FY15, the company's export exposure worth $7mn is already hedged in the range of Rs6-7/$. Company is expecting to realize Rs6/$ in FY14 and Rs62.5/$ in FY15. Company expects INR/USD realization of Rs61.25/61.5 in Q4FY14 as against Rs6.9 in Q3FY14. Over the medium to longer term, recovery in urban demand could help Pulsar share increase in the mix and thereby aid margins. Bajaj Auto - Margins have remained strong despite weak volumes (%) 24. 21. 18. 15. 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 Source: Company, Kotak Securities - Private Client Research Auto Expo 214 - Focus was on scooters and high cc motorcycles In Auto Expo 214, 2W players' focus was largely concentrated towards scooters and higher CC motorcycles. Almost all the companies showcased products in the scooter segment, clearly indicating that the 2W manufacturers continue to stay gung ho on the future prospects of this segment. BAL continues with its strategy of staying away from the scooter segment. In the motorcycle segments, most of the products displayed were in the 25cc and higher category. BAL unveiled Pulsar CS4 and Pulsar SS4 in the 2W segment. Apart from this, the company also showcased U car concept. Valuations At the CMP of Rs1,921, the stock trades at 13.7x its expected FY15 expected EPS of Rs139.9. We contain to maintain our BUY rating on Bajaj Auto with unchanged price target of Rs2,239. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6