CMP: Rs.1426 Recommendation: Buy Target Price: Rs.1593 Key Data Financial Year End March Market Cap (Rs. Cr.) 41,241 Market Cap (USD Bn.) 9.2 Free Float Factor 0.49 52 Week H/L 1664.5/1189.6 Avg. 12M volumes ('000) 544 Face Value 10 Bloomberg BJAUT IN Reuters BAJA.BO NSE BAJAJ-AUTO BSE 532977 Source: BSE, SIHL Research Shareholding Pattern Q1 FY12 Q4 FY11 Promoters 50.0% 50.0% FII's 15.8% 15.9% DII's 8.1% 7.9% Others 26.1% 26.1% Source: BSE, SIHL Research 1700 1600 1500 1400 1300 1200 1100 Bajaj Auto Source: Ace Equity, SIHL Research Sensex (Rebased) Harsh Mehta (Research Analyst) harsh.mehta@sihl.in Q1 FY12 Result Update Bajaj Auto Ltd. (BAL) Q1 FY12 result was in line with our estimates. On a volume growth of 17.7% YoY (15.3% QoQ), gross revenues increased by 21.6% YoY (11.5% QoQ) to Rs.4,793 Cr (v/s est. Rs.4,729 Cr.). EBITDA margin in Q1 FY12 for BAL is at 19.1% after maintaining 20%+ EBITDA margin in last seven quarters. Net profit in Q1 FY12 is at Rs.711 Cr. due to lower tax rate. Key Highlights Total income grew by 22.8% YoY (13.7% QoQ) to Rs.4,777 Cr., driven by volume growth of 17.7% YoY (15.3% QoQ). EBITDA margin declined by 91 bps YoY (-145 bps QoQ) to 19.1% due to 76 bps YoY increase in raw material cost and 48 bps YoY increase in purchase of traded goods. Blended net realization per vehicle declined by 1.3% QoQ to Rs.43,715 despite price hikes of 2-3% incorporated in domestic market in April 2011 and in export market in May 2011. The lower net realization QoQ was due to unfavorable product mix wherein the contribution of 125cc+ bikes declined from 46% in Q4 FY11 to 43% in Q1 FY12. Eventually June 2011 month registered the highest ever motorcycle sales volume for BAL. The other income at Rs.73 Cr. was lower than our expectation of Rs.91 Cr. The tax rate came in 25.4%, lowest in eight quarters, primarily on account of higher production from Pantnagar plant and reduction in Income Tax surcharge from 7.5% to 5% in Q1 FY12. Valuation & Outlook We have marginally revised our EPS target for FY12 to Rs.108 (earlier Rs.106). Blended net realization has been revised 1.6% upwards to factor in price hikes in remaining part of the year. We assume lower other income (Rs.1100 Cr. sales tax credit in Maharashtra is not yet realized) would be offset by lower tax at 26.5%, as contribution from Pantnagar plant increases. Our estimates have factored in discontinuance of DEPB scheme from Q3 FY12 onwards. Launch of Boxer 150cc will further strengthen the market share of Bajaj Auto in premium bike segment. Issuance of fresh permits in 3 wheeler segment would be an added boost for 3 wheeler domestic segment volume growth. The stock is attractively valued at PE of 13.2x its FY12E EPS of Rs.108. We maintain a BUY with a target price of Rs.1,593 on DCF basis. Ameya Hardas (Head of Research) ameya.hardas@sihl.in 1 P age
Exhibit1: Quarterly Volume Break Up Product Mix Q1 FY12 Q1 FY11 YoY Q4 FY11 QoQ Motorcycle 962,961 828,391 16.2% 836,668 15.1% Domestic 623,140 566,121 10.1% 617,252 1.0% % of total Motorcycle 64.7% 68.3% 73.8% Exports 339,821 262,270 29.6% 219,416 54.9% % of total Motorcycle 35.3% 31.7% 26.2% 3 Wheeler 129,854 99,918 30.0% 111,525 16.4% Domestic 42,311 38,289 10.5% 55,100-23.2% % of total 3 Wheeler 32.6% 38.3% 49.4% Exports 87,543 61,629 42.0% 56,425 55.1% % of total 3 Wheeler 67.4% 61.7% 50.6% Total 1,092,815 928,309 17.7% 948,193 15.3% Exhibit 2: Bajaj Auto trend in Market Share Q1 FY12 Q1 FY11 YoY (bps) Q4 FY11 QoQ (bps) Motorcycle 25.3% 27.0% (168) 23.4% 189 Scooter - 0.01% - 2 Wheeler 19.6% 20.8% (121) 19.9% (35) 3 Wheeler 38.4% 36.4% 199 38.6% (20) Source: SIAM, SIHL Research Outlook remains positive driven by strong momentum in 2 wheelers and launch of Boxer 150cc and new variant of Pulsar BAL ended Q1 FY12 on a positive note with 2 wheeler domestic segment growing at 10.1% YoY (1.0% QoQ) to 623,140 units and 2 wheeler export segment growing at 29.6% YoY (54.9% QoQ) to 339,821 units. The market share for motorcycle (Exhibit 2) is around 25.3% in Q1 FY12 which saw a shrinkage of 168 bps YoY (gain of 189 bps QoQ). The contribution of 125cc+ bikes declined from 46% in Q4 FY11 to 43% in Q1 FY12. Sales of Pulsar have gone down in Q1 FY12 (decline in contribution of 125cc+ bikes) due to marriage season in North India, as people tends to buy more of sub 125cc bikes (Discover). In Q2 FY12, with colleges reopening, demand for Pulsar is expected to pick up its original pace. The company is planning to launch Boxer 150cc in August 2011 and refreshed variant of Pulsar. The launch of Boxer 150cc would hardly cannibalize the existing products of Discover family as Boxer is simple in styling and more of a functional bike targeted towards rural India, while Discover is high on styling and caters to the urban market. We expect BAL to improve its motorcycle market share going forward with recent launch of Discover 125cc and expected launch of Boxer 150cc. The company will launch its first Bajaj-KTM Duke 200 cc bikes in H2 FY12. BAL management expects to sell around 25,000-30,000 units in India in the first year of launch. Launch of Duke 200cc will further strengthen its market share in premium segment going forward. 2 P age
Fresh Permits to Boost 3 Wheeler Volumes On 3 wheeler front, BAL registered a growth of 10.5% YoY (de-growth of 23.2% QoQ) to 42,311 units in domestic market and growth of 42.0% YoY (growth of 55.1% QoQ) to 87,543 units in export market. The demand for 3-wheeler in domestic market will be robust for the next 3-5 months as Karnataka state has floated permits for the purchase of 40,000 new 3 wheeler vehicles. The permit for the purchase of new 3-wheeler is also round the corner in state of Maharashtra. High growth potential in export volumes BAL registered strong exports growth of 31.9% YoY (54.9% QoQ) to 427,364 units in Q1 FY12. The export growth was aided by 29.6% YoY (54.9% QoQ) growth in 2 wheeler segment to 339,821 units and 42.0% YoY (55.1% QoQ) growth in 3 wheeler segment. Africa being a key export market contributes around 45% of total export volumes. Within Africa, 60% of its sales come from Nigeria; Boxer constitutes 95% of the volumes. BAL bikes enjoys 40-50% premium to Chinese players in Africa. Going ahead, we estimate BAL to register export volume growth of 21.4% YoY in FY12 to 1.46 mn units, driven by strong demand outlook in export market. The management is planning to take price increase in the export market in August 2011. BAL has hedged 90 93% of its FY12 exports at a USD INR rate of Rs.46.5-47 and around 30% of exports at a minimum of USD-INR rate of Rs.47 in FY13. Hence, any sharp appreciation of the INR in FY12 will not have a significant impact on the company s margins. Exhibit 3: Estimates for FY12 FY12E Total Volumes* 4,555,000 2 Wheeler 4,080,000 3 Wheeler 475,000 Export of the Above 1,461,250 Net Income (Rs. Cr.) 20,227 EBITDA Margins 20.1% PAT (Rs. Cr.) 3,126 PAT Margins 15.5% *We have not considered Bajaj KTM Duke Sales in our FY12 estimates. With more clarity coming in, on the response this bike model shows in quarterly results ahead, we will revise our estimates accordingly. Withdrawal of DEPB Duty Entitlement Pass Book (DEPB) scheme benefit is around 7-9% in Auto sector. If withdrawn (government has extended DEPB scheme till Sept 2011 and has indicated that the scheme would be replaced by an alternate scheme, duty drawback) BAL would find it difficult to move to duty drawback because its inputs are largely domestic. The management has stated that any loss due to withdrawal of DEPB scheme would be recouped through duty drawback, and partly passed on to the customers, and partly shared with dealers. Our estimates have factored in withdrawal of DEPB scheme from Q3 FY12 onwards. Estimates for FY12 We have marginally revised our EPS estimates for FY12 to Rs.108 (earlier Rs.106, in our Q4 FY11 result update). Blended net realization has been revised 1.6% upwards to factor in price hikes in remaining part of the year. We assume lower other income (Rs.1100 Cr. sales tax credit in Maharashtra is not yet realized) would be offset by lower tax at 26.5% (earlier 27.5%), as contribution from Pantnagar plant increases. Our estimates factor in Volume growth of 19.1% in FY12 to 4,555,000 units EBITDA Margin of 20.1% in FY12 Tax Rate at 26.5% in FY12 Pat Margin of 15.5% in FY12 3 P age
Income Statement (Quarterly) (Rs Cr.) Q1 FY12 Q1 FY11 YoY% Q4 FY11 QoQ% Total Volumes 1,092,815 928,336 17.7% 948,195 15.3% Gross Sales 4,793 3,942 21.6% 4,299 11.5% Less: Excise Duty 207 205 248 Net Sales 4,587 3,737 22.7% 4,052 13.2% Other Operating Income 190 153 148 Total Income 4,777 3,890 22.8% 4,200 13.7% Total Expenditure 3,866 3,113 24.2% 3,338 15.8% EBITDA 911 777 17.2% 862 5.7% EBITDA Margins% 19.1% 20.0% (91) 20.5% (145) Other Income 73 82 101. Depreciation 31 32 30.1 EBIT 953 827 15.3% 933 2.2% EBIT Margins % 20.0% 21.3% (130) 22.2% (225) Interest 0.23 0.6 0.1 Exceptional Items - - 725 PBT 953 826 15.4% 1,657-42.5% PBT Margins % 19.9% 21.2% (129) 39.5% (1,950) Tax 242 236 256.53 PAT 711 590 20.5% 1,400-49.2% PAT Margins % 14.9% 15.2% (29) 33.3% (1,846) Income Statement (Annual) (Rs. Cr.) FY09 FY10 FY11 FY12E Gross Sales 90,588 121,527 169,621 213,365 Less: Excise Duty 6,127 6,096 9,334 15,171 Net Sales 84,460 115,432 160,287 198,194 Other Operating Income 3,688 4,310 6,135 4,019 Total Income 88,148 119,742 166,422 202,213 Total Expenditure 76,803 93,869 132,676 161,506 EBITDA 11,345 25,872 33,746 40,707 EBITDA Margin 12.9% 21.6% 20.3% 20.1% Other Income 1,117 1,225 3,658 3,658 Depreciation 1,306 1,374 1,239 1,837 EBIT 11,156 25,723 36,165 42,528 EBIT Margins % 12.7% 21.5% 21.7% 21.0% Interest 219 68 24 8 Exceptional Items 2,051 1,615 8,268 - PBT 8,886 24,041 44,410 42,520 PBT Margins % 10.1% 20.1% 26.7% 21.0% Tax 2,888.8 7,060.7 10,092.9 11,267.7 PAT 5,997 16,980 34,317 31,252 PAT Margins % 6.8% 14.2% 20.6% 15.5% 4 P age
Balance Sheet Consolidated (Rs. Cr.) FY09A FY10A FY11E FY12E Sources of Funds Shareholder's Fund 1,813 2,717 4,807 6,578 Share Capital 145 145 289 289 Reserves & Surplus 1,668 2,572 4,518 6,289 Total Debt 1,595 1,361 347 422 Deferred Tax Liability (net) 4 2 - - 3,412 4,080 5,155 7,000 Application of Funds Fixed Assets 1,552 1,525 1,925 1,991 Gross Block 3,340 3,386 3,771 4,021 Less: Depreciation & Write Down 1,809 1,902 1,916 2,100 Net Block 1,530 1,483 1,855 1,921 Capital WIP 22.1 41.5 69.9 69.9 Investment 1,423 3,445 4,284 4,284 Deferred Tax Assets (net) 26 34 7 7 Current Assets, Loans & Advances 2,302 3,028 7,700 9,994 Inventories 372 458 576 699 Sundry Debtors 281 272 342 415 Cash and Bank Balances 143 107 575 7,809 Other Current Assets 126 106 216 263 Loans & Advances 1,381 2,085 5,990 809 Current Liabilities and Provision 2,458 4,281 8,761 9,276 Liabilities 1,234 2,032 2,437 2,952 Provision 1,224 2,249 6,324 6,324 Net Current Assets -156-1,253-1,062 718 3,412 4,080 5,155 7,000 Cash Flow (Annual) (Rs. Cr.) FY09A FY10A FY11E FY12E Cash Flow from Operations 329 2,564-219 8,763 PAT 536 1,595 3,455 3,125 Depreciation 131 137 124 184 Non Cash Adjustment 257 814 - - VRS Payout -216-18 - - Change in WC -378 36-3,798 5,454 Cash Flow from Investing -173-1,935-250 -250 Capital Expenditure -285-2,059-250 -250 Other Investing Cash Flow 112 124 - - Cash Flow from Financing -84-664 -2,368-1,280 Issue of Equity - - - - Issue/Repay of Debt 262-251 -1,014 74 Dividend Paid -289-317 -1,157-1,157 Dividend Tax -49-5 -197-197 Other Financing Cash Flow -8-90 - - Net Cash 71-35 -2,837 7,233 Opening Balance 71 143 107 575 Closing Balance 143 107 575 7,809 5 P age
Peer Group Analysis Hero Honda Bajaj Auto TVS 2010 2011 2012E 2010 2011 2012E 2010 2011 2012E 2 Wheeler nos. 4,600,130 5,402,404 6,000,000 2,506,845 3,387,018 4,080,000 1,521,939 2,006,808 2,347,965 3 Wheeler nos. - - - 340,936 436,884 475,000 14,980 39,860 71,748 BV 173.5 150.3 143.6 187.8 166.1 227.3 26.1 16.4 19.6 EPS 111.8 96.5 112.5 110.2 119.4 108.0 3.71 4.05 4.41 P/BV 10.5 12.1 12.2 7.5 8.5 6.3 1.9 3.1 2.6 P/E 16.3 18.8 15.6 12.9 11.9 13.2 13.6 12.5 11.5 ROE 64.4% 64.2% 78.4% 58.7% 71.9%* 47.5% 14.2% 24.6% 22.4% ROCE 80.3% 82.1% 95.8% 66.4% 70.2% 60.8% 8.4% 16.8% 17.0% EBITDA Margins 17.4% 13.5% 15.3% 21.6% 20.6% 20.1% 2.8% 6.4% 6.9% EV/EBITDA 13.4 12.1 9.9 6.1 12.2 8.3 18.6 7.9 5.9 * Q4 FY11 had an exceptional gain of Rs.826.8Cr. (Exceptional gain has resulted due to Sales tax deferral incentive/loan prepayment to the Government of Maharashtra during the year FY11). Excluding this exceptional gain the ROE is 54.2% 6 P age
Valuation & Assumptions DCF Based Valuation for Bajaj Auto = Rs.1593/Share Rs. Cr. FY12E FY13E FY14E FY15E FY16E FY17E FY18E Terminal Value Free Cash Flow 5,804 1,882 2,205 2,300 2,962 3,507 4,211 62,827 NPV of Cash Flow 5,231 1,528 1,614 1,517 1,760 1,878 2,032 -- NPV of Terminal Value 30,318 Source: SIHL Research Terminal Growth Rate 4% Total Enterprise Value (Rs. Cr.) 45,877 Beta 0.7 Net Debt (Rs. Cr.) (228) Risk Free Rate 8% No of Shares (Cr.) 28.94 Market Premium 6% Value per Share 1593 Cost of Debt 8% Cost of Equity 12.5% WACC 10.97% Debt 33% Equity 77% Source: SIHL Research We have marginally revised our EPS target for FY12 to Rs.108 (earlier Rs.106). Blended net realization has been revised 1.6% upwards to factor in price hikes in remaining part of the year. We assume lower other income (Rs.1100 Cr. sales tax credit in Maharashtra is not yet realized) would be offset by lower tax at 26.5%, as contribution from Pantnagar plant increases. Our estimates have factored in discontinuance of DEPB scheme from Q3 FY12 onwards. Launch of Boxer 150cc will further strengthen the market share of Bajaj Auto in premium bike segment. Issuance of fresh permits in 3 wheeler segment would be an added boost for 3 wheeler domestic segment volume growth. The stock is attractively valued at PE of 13.2x its FY12E EPS of Rs.108. We maintain a BUY with a target price of Rs.1,593 on DCF basis. 7 P age
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