BAJAJ-AUTO

Accumulate Bajaj Auto; target Rs 1,632

BAL 3QFY12 results remained ahead of estimates. Strong export realizations helped the company post 21% EBITDA margin which was better than anticipated. Adjusted for MTM losses, company net profit remained healthy.

During the quarter, the company gained from the sharp rupee depreciation and the same was visible in the robust EBITDA margin posted by the company.

Company expects the domestic motorcycle demand to remain soft in the near term but is extremely confident on the export and 3W sales. Strong export and 3W volumes should more than compensate the slackening domestic 2W demand.

BAL has planned for three new motorcycle launches over the next few months which we believe will give some impetus to domestic sales in FY13.

Given subdued domestic 2W demand, we are slightly lowering our FY12 and FY13 volume estimates. On the other hand, in view of weak rupee we are increasing our EBITDA margin estimates. Our revised net profit estimates stands lower by 2% for FY13 and almost similar for FY12 as against our earlier estimates.

Due to 2% lowering of FY13 earnings estimate, we lower our price target to Rs 1,632 (earlier Rs 1,666) and continue to maintain our Accumulate rating for the stock.

Hold Bajaj Auto; target Rs 1,460

Bajaj Auto (BAL) reported its Q3FY12 numbers with sales coming in above our estimate at Rs 50.63 billion (I-direct estimate: Rs 48.68 billion) 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 realization/ unit (up 5.0% YoY) to Rs 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 Rs 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 Rs 7.95 billion (I-direct estimate: Rs7.88 billion), a jump of 19.2% YoY. However, we will analyze beyond these numbers further in the report.

Highlights of the quarter:

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 Rs 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 Rs 1,460. We maintain our HOLD rating on BAL.

Buy Bajaj Auto; target of Rs 1,755

Bajaj Auto (BJAUT) reported strong 21.2% yoy (down 3.9% qoq) growth in net sales to Rs 50.63 billion, driven largely by strong exports performance. While export volumes witnessed robust 28.4% yoy (down 10.1% qoq) growth, export realization grew by strong 17.6% yoy (9.8% qoq), led by price increases and favorable currency movement. As a result, exports revenue jumped by 51.1% yoy (down 1.3% qoq).

Domestic performance, however, was muted as volume and realization posted moderate growth of 6.8% (down 6.2% qoq) and 1.2% yoy, respectively, leading to domestic revenue growth of 8.1% yoy (down 5.5% mom). EBITDA margin surprised positively as it touched 21%, primarily on account of easing of raw-material prices and favorable currency movement on the exports front. Led by strong operating performance and lower tax rate, net profit registered strong 19.2% yoy (9.6% qoq) growth to Rs 7.95 billion. During 3QFY2012, BJAUT reported mark-to-market (MTM) loss of Rs 590 million relating to hedging contracts, which restricted the bottom-line growth.

Valuation:

At the CMP, the stock is trading at 12.5x FY2013 earnings. Post the recent correction in the stock price, we recommend `Buy` on the stock with a target price of Rs 1,755. 

Buy Bajaj Auto; target Rs 1,870

Bajaj Auto 3QFY12 results are in-line with adj PAT at Rs 8.34 billion (v/s est Rs 8.4 billion). While volumes were lower than estimates, realizations surprised positively, leading to EBITDA margins at 21% (est 20.6%). Key highlights:

Volumes grew 13.6% YoY to 1.07 million units (down 7.6% QoQ). Average realization was up 6.7% YoY (4.1% QoQ) to Rs 47,080 (v/s est Rs 43,834). Net revenue grew 21% to Rs 50.6 billion (v/s Rs 51.4 billion).

EBITDA margin improved 90bp QoQ (70bp YoY) to 21% (v/s est 20.6%), led from higher realizations. Adj PAT grew 25% YoY to Rs 8.34 billion.

It maintained its lowered FY12 volume guidance of 4.4 million units (~16% growth), with exports guidance of over1.5 million units. It expects the motorcycle industry to grow at 5-6% in Q4FY12.

While it did not give volume guidance for FY13, it expects industry to clock 12% CAGR for the next 3-4 years. It is also confident of maintaining export volume growth of ~20% in FY13 and EBITDA margins at 20%.

The company will be launching KTM Duke 200 on Jan. 24,2012 and would follow with two more launches (a new Pulsar and Discover), while RE60 is likely to be launched towards end-CY12.

We maintain our estimates. The stock is valued at 14.1x FY12E EPS of Rs110.4 and 12.5x FY13E EPS of Rs124.6. Maintain Buy with target price of Rs 1,870 (15x FY13E EPS).

Buy Bajaj Auto; target Rs 1,920

Net sales at Rs 50.6 billion (21% YoY, -4% QoQ) was marginally above our est. of Rs 50 billion. Average selling price (ASP) was at Rs 45,004 (6% YoY, 4% QoQ) marginally higher than our est. Significant increase was seen in export ASP`s at Rs 44,892 (18%YoY/ 10% QoQ). ASPs benefited from favorable currency, price hikes of 3.5% QoQ taken in export markets and 1% QoQ in domestic market taken during the quarter.

EBITDA was at Rs 10.6 billion 2% above our est. of Rs 10.3 billion. This was largely led by lower other expenses and marginally better topline. Other expenses came at Rs 3 billion vs our est. of Rs 3.1 billion. RM/sales was in line with our est. at 70.4%. Staff costs at Rs 1.3 billion (~2.5% of sales) was also in line with our estimate.

Adjusted net profits at Rs 8.4 billion (4% above est.) benefited from higher other income and lower tax rate. Other income came at Rs 908 million vs our est. of Rs 819 million. Effective tax rate at 25.1% was lower than our est. of 25.7%. However, depreciation expense at Rs 321 million was higher than our est. of Rs 287 million. Company has received an NCCD claim of Rs 778 million from govt. for sales from Pantnagar which is under dispute. Hence, no provision has been made for the same.

Accumulate Bajaj Auto; target Rs 1,581

Bajaj Auto (BJA) reported 21.2% YoY improvement in its top-line at Rs 50.6 billion (PLe: Rs 50 billion), mainly on account of 13.6% YoY volume growth and 6.7% YoY realization growth. On a sequential basis, the top-line de-grew by 4.0%, mainly on account of 7.6% QoQ decline in volumes. However, blended realizations were higher by 4.0% QoQ, mainly on account of a more than 10% QoQ improvement in average/realization in the export segment. Absolute EBITDA grew by 25.0% YoY at Rs10.6 billion (PLe: Rs10.4 billion), whereas Adj. PAT (Adj. for MTM Forex loss of Rs 589 million) grew by 28% YoY at Rs 8.4 billion, mainly on account of lower tax rate which stood at 25.1% (as against 27.3% in Q3FY11).

Export volumes for the quarter grew at 28.4% YoY, whereas the average realization/vehicle was up 17.6% YoY. As a result, export revenues for the quarter were up 51% YoY at Rs 17.1billion. On a sequential basis, BJA got the benefit of 6% on export realization due to rupee depreciation in addition to a 3.5%-4.0% price hike taken on exports. As a result, raw material/total income ratio decreased by 100bps QoQ, thereby, leading to a 1% increase in the EBITDA margins to 21.0% (PLe: 20.7%).

We expect the two-wheeler volumes to grow by 11% YoY at 4.28 million in FY13E, mainly driven by 18% YoY growth in the export volumes at 1.48 million. We expect the three-wheeler volumes to grow at 11% YoY in FY13E.

Outlook & Valuation:

With slowdown evident in the two-wheeler segment, we are cautious on the domestic two-wheeler growth. However, with 50% of the revenues for BJA coming from relatively stable export and three-wheeler business, we remain positive on the stock. At the CMP, the stock trades at 12.1x its FY13E EPS, which in our view is attractive. Maintain `Accumulate`."

Buy Bajaj Auto; target Rs 1,850

The high-margin brands Pulsar and Discover, account for 70% of the Bajaj Auto`s motorcycle sales thus validating its brand-centric strategy. The company is scheduled to launch a complete upgrade of the Pulsar family and KTM branded motorcycles in Q4FY12 followed by another motorcycle in mid-2012. With the help of new product launches and high double digit growth in export markets, we expect Bajaj Auto to achieve overall volume growth of 16.2% in FY12 and 11.9% in FY13. The rupee depreciation along with the price hikes undertaken is expected to boost export profitability.

What will move the stock?

1) We expect Bajaj Auto to maintain market share with domestic volume growth of 16% in FY12, in line with the industry despite increasing competition. 2) Exports currently contribute 35% of the total revenues for the company. The company undertook a price hike of 3.5% in all export geographies to compensate for the lower export benefit under the Duty drawback scheme. The rupee depreciation, increase in benefit rate under the Focused Market Scheme (FMS) and an additional 1% special incentive till FY12 are set to substantially boost export profitability. 3) BJAUT recently showcased the RE60 touted as an upgrade to the passenger three - wheeler. The product would first be launched in Sri Lanka wherein the current three-wheeler finds acceptance in the personal segment too. 4) With high realisations in export markets and rich product mix, we expect BJAUT to maintain EBITDA margins near the 20% mark in FY12 and FY13.

Where are we stacked versus consensus?

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs 123.3, respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,850 discounting FY13E earnings at 15x. Our FY13 earnings estimate is 3.3% higher than the consensus estimate of Rs 119.4.

What will challenge our target price?

1) Loss of market share and lack of pricing power due to increase in competition would affect the company`s ability to pass on cost inflation. 2) Slowdown in export markets is also a key risk to our volume estimate.

 

Buy Bajaj Auto; target Rs 1,850

The high-margin brands Pulsar and Discover, now account for 70% of the Bajaj Auto`s motorcycle sales thus validating its brand-centric strategy. The company is scheduled to launch a complete upgrade of the Pulsar family and KTM branded motorcycles in Q4FY12. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12E and 11.9% in FY13E. Export profitability is all set to get a boost due to the price hikes taken and the rupee depreciation.

Drivers:

1) the two-wheeler industry is less sensitive to current macro headwinds. We expect Bajaj Auto to maintain market share with domestic volume growth of 16%, in line with the industry. 2) The company undertook a price hike of 3.5% in all export geographies to compensate for the lower export benefit under the Duty drawback scheme. The rupee depreciation, increase in benefit rate under the Focused Market Scheme (FMS) and an additional 1% special incentive till FY12 are set to substantially boost export profitability. 3) The company recently launched Boxer-150, thus reviving the Boxer brand, which is targeted at the rural segment (where Hero MotoCorp is the dominant player) and 4) With continued contribution from three wheelers and the high margin motorcycles, we expect BJAUT to restrict contraction in margins to 70 bps in FY12.

PINC estimates versus consensus:

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs 123.3, respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,850 discounting FY13E earnings at 15x. Our FY12 earnings estimate is 1.2% higher than the consensus estimate of Rs 106.2.

Challenge to target price:

1) Significant increase in prices of commodities such as steel and rubber might exert pressure on margins.

 Neutral Bajaj Auto; target Rs 1,737

Bajaj Auto (BJAUT) reported inline growth of 25.1% yoy (down 5.3% mom) in its total volumes to 374,477 units, led by strong exports performance, which grew by robust 42.2% yoy (down 2% mom). Exports continued their strong momentum despite price increases carried out in October 2011 to offset the reduction in DEPB benefits. Motorcycle sales grew by 25.3% yoy (down 5.4% mom) and three-wheeler volumes increased by 24.3% yoy (down 3.8% mom) during the month.

Valuation:

At Rs 1,713, the stock is trading at 14.8x FY2013E earnings. Due to the limited upside from current levels, we recommend Neutral on the stock. Our fair value for the stock works out to Rs 1,737.

 

Buy Bajaj Auto; target Rs 2,200

Our analysis indicate that current valuations are factoring in flat EBIDTA YoY (17% lower v/s our estimates) or a sharp drop in valuations. We believe that concerns are overdone, given the low sensitivity of EPS to change in volumes (discussed later) and adequate levers to compensate for pressure on earnings due to lower volumes.

There are concerns on the exports front given the macroeconomic environment. However, we believe that there are positive surprises in store from long term perspective. We see a clear strategy of the company in expanding its geographical presence- first to enter a market with most suitable product and then introduce bouquet of products in the market. More importantly, Africa can be a big growth driver. As can be seen from the table below, contrary to perception, there is immense opportunity in Africa, given the expectation of increase in per capita income. Also, we came across data that indicate that GDP growth of the continent has been contributed by diverse sectors and share of resources/minerals in the growth is less than 25%. We have factored in a volume growth of 16% in our model for FY13 for Bajaj Auto.

Bajaj Auto has one of the most balanced product mixes. The contribution of each of its franchise to Sales/EBIDTA is reasonable. Thus there is no major risk of pressure on account of disappointment of a single franchise. The single largest contribution to EBIDTA is exports (including exports incentive). The share of export + incentives is 35% of overall EBITDA.

Margins can continue to surprise positively With a significant shift in the product mix, we believe that margins are now more stable for the company as there is lower reliance on three wheelers, which was the case earlier. Also, we believe that margins are sustainable despite the fact these are historic high margins for the company. We would like to highlight that the upgrades in the margins are largely due to currency. We have not factored in improvement in margins due to lower raw material costs as well as better product mix (launch of a new Pulsar in 4QFY12 and opening new permits in Karnataka and Delhi).

We believe there exists upside risk to margins/EPS estimates due to currency. We have modeled our FY13 estimates at USD/Re of 47. Every 1% change currency can impact our EPS by 1%. Company has already hedged its budgeted exports for a range forward of 47- 51 for Re/USD. Our sensitivity analysis indicates for every 1% change in volumes, impact on EBITDA varies from <1% (Platina) to 2.5% (three wheelers).

Valuation:

The stock currently trades at EV/EBIDTA of 9.6x/7.7x and PER of 14.2x/12.3x our FY12/FY13 estimates. We are 6%/9% above consensus at EPS level for FY12/13. Given the margin profile, low fixed cost business model, strong FCF generation (15% of sales), in house R&D, we believe stock has the characteristic of FMCG/Paints companies. However, current stock price is implying flat EBIDTA YoY in FY13 (17% drop vs our estimates) or 18% drop in target valuations multiples. We have assigned a valuation multiple of 17x to the company. We also looked at valuations on SOTP basis given the concerns with exports. We arrived at target price of Rs 1,926 (14.8x PER). We believe that any downside risk to earnings due to volumes will be compensated by favorable currency and lower metal prices.

Buy Bajaj Auto; target Rs 2,200

Our analysis indicate that current valuations are factoring in flat EBIDTA YoY (17% lower v/s our estimates) or a sharp drop in valuations. We believe that concerns are overdone, given the low sensitivity of EPS to change in volumes (discussed later) and adequate levers to compensate for pressure on earnings due to lower volumes.

There are concerns on the exports front given the macroeconomic environment. However, we believe that there are positive surprises in store from long term perspective. We see a clear strategy of the company in expanding its geographical presence- first to enter a market with most suitable product and then introduce bouquet of products in the market. More importantly, Africa can be a big growth driver. As can be seen from the table below, contrary to perception, there is immense opportunity in Africa, given the expectation of increase in per capita income. Also, we came across data that indicate that GDP growth of the continent has been contributed by diverse sectors and share of resources/minerals in the growth is less than 25%. We have factored in a volume growth of 16% in our model for FY13 for Bajaj Auto.

Bajaj Auto has one of the most balanced product mixes. The contribution of each of its franchise to Sales/EBIDTA is reasonable. Thus there is no major risk of pressure on account of disappointment of a single franchise. The single largest contribution to EBIDTA is exports (including exports incentive). The share of export + incentives is 35% of overall EBITDA.

Margins can continue to surprise positively With a significant shift in the product mix, we believe that margins are now more stable for the company as there is lower reliance on three wheelers, which was the case earlier. Also, we believe that margins are sustainable despite the fact these are historic high margins for the company. We would like to highlight that the upgrades in the margins are largely due to currency. We have not factored in improvement in margins due to lower raw material costs as well as better product mix (launch of a new Pulsar in 4QFY12 and opening new permits in Karnataka and Delhi).

We believe there exists upside risk to margins/EPS estimates due to currency. We have modeled our FY13 estimates at USD/Re of 47. Every 1% change currency can impact our EPS by 1%. Company has already hedged its budgeted exports for a range forward of 47- 51 for Re/USD. Our sensitivity analysis indicates for every 1% change in volumes, impact on EBITDA varies from <1% (Platina) to 2.5% (three wheelers).

Valuation:

The stock currently trades at EV/EBIDTA of 9.6x/7.7x and PER of 14.2x/12.3x our FY12/FY13 estimates. We are 6%/9% above consensus at EPS level for FY12/13. Given the margin profile, low fixed cost business model, strong FCF generation (15% of sales), in house R&D, we believe stock has the characteristic of FMCG/Paints companies. However, current stock price is implying flat EBIDTA YoY in FY13 (17% drop vs our estimates) or 18% drop in target valuations multiples. We have assigned a valuation multiple of 17x to the company. We also looked at valuations on SOTP basis given the concerns with exports. We arrived at target price of Rs 1,926 (14.8x PER). We believe that any downside risk to earnings due to volumes will be compensated by favorable currency and lower metal prices.

Buy Bajaj Auto; target Rs 1,850

The high-margin brands Pulsar and Discover, now account for 70% of Bajaj Auto`s motorcycle sales thus validating its brand-centric strategy. The company is scheduled to launch a complete upgrade of the Pulsar family and KTM branded motorcycles in Q4FY12. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12E and 11.9% in FY13E. Export profitability is all set to get a boost due to the price hikes taken and the rupee depreciation.

What will move the stock?

1) The two-wheeler industry is less sensitive to current macro headwinds. We expect Bajaj Auto to maintain market share with domestic volume growth of 16%, in line with the industry. 2) The company undertook a price hike of 3.5% in all export geographies to compensate for the lower export benefit under the Duty drawback scheme. The rupee depreciation, increase in benefit rate under the Focused Market Scheme (FMS) and an additional 1% special incentive till FY12 are set to substantially boost export profitability. 3) The company recently launched Boxer-150, thus reviving the Boxer brand, which is targeted at the rural segment (where Hero MotoCorp is the dominant player) and 4) With continued contribution from three wheelers and the high margin motorcycles, we expect Bajaj Auto to restrict contraction in margins to 70bps in FY12.

Where are we stacked versus consensus?

Our FY12 and FY13 earnings estimates are Rs107.5 and Rs123.3, respectively. We have a `Buy` recommendation on the stock with a target price of Rs1,850 discounting FY13E earnings at 15x. Our FY12 earnings estimate is 1.2% higher than the consensus estimate of Rs 106.3.

What will challenge our target price?

1) Significant increase in prices of commodities such as steel and rubber might exert pressure on margins.

Buy Bajaj Auto; target Rs 1,870

We are raising our FY2012 earnings per share (EPS) estimates by 11.9% from Rs 100.6 to Rs 112.6. Our new FY2013 estimates stand at Rs124.7 per share. For FY2013 the EPS growth is pegged at just 11% due to higher tax effect while the profit before tax (PBT) is expected to grow by 18.3%. At the current market price of Rs 1,750, the stock is trading on a higher band of 14x FY2013 expected earnings. This is at a 10% discount to one year forward valuation of Hero Motocorp.

We believe the two wheeler sector has outperformed the rest of the automobile sector in difficult times. Limited competitive intensity over the next one year, marginal capex requirement and incumbents taking most of the share will support higher valuations.

Bajaj Auto`s valuation discount vis-Ã -vis Hero Motocorp can even out due to its global stature (exports and KTM), successful domestic strategy, product diversification (three wheelers) and technological independence.

Even on a standalone basis, almost 75% of the sheet consists of liquid investments with the FY2011 return on capital employed (ROCE) touching 70%. With a marginal capex of Rs 5 billion in the next two years, the company would generate a cash profit of over Rs110 a share every year in the near term.

Given the strong fundamentals of the company, we are valuing it at 15x FY2013E earnings with a target price of Rs 1,870, at par with Hero Motocorp. We recommend Buy.

Bajaj Auto Buy Accumulate; target Rs 2,210

"anagement expects industry demand to moderate to 12-13% in H2FY12. For FY12, industry growth is maintained at 14%.

Company maintains overall volume target of 4.5 million units in FY12 (3 wheelers of 500,000 units). Expect exports to compensate for lower domestic volumes. Targets 1.5 million units of exports in FY12.

Export incentives to reach 11.5% of total exports in H2FY12 as per the new scheme. (5.5% from new duty drawback scheme, 4% from focus markets scheme, 1% increase in incentives till March 2012 (retrospective from April 2011). Going ahead, incentives to be maintained at 9.5% of exports from FY12 onwards.

Company has hedged targeted exports for H2FY12 and 90% of exports for FY13 with a lower band of Re 47 to upper band of Re 51/52 a USD. Company enters into range forward contracts so that it can benefit from favorable movement in currency.

Company had to incur a onetime interest charge of Rs 200 million pertaining to interest on disputed duty liability and Rs 90 million depreciation expense on certain assets imported. Going ahead, management expects interest and depreciation charges to normalize to 1QFY12 levels.

Pricing: In domestic market, company has taken a price hike of Rs 500 across motorcycles and Rs 1,000 in 3 wheelers from Oct. onwards. Also, 3.5% price hike is taken in exports to offset the lower incentives.

Raw material prices are expected to stabilize at these levels. Company enters into quarterly contracts for Steel and quantity based contracts for Aluminium (3 months). Contracts for Q3FY12 for steel have been at rates similar to 2QFY12.

Company enjoys 100% income tax rebate for 5 years from Pantnagar plant which is set to expire by March 2012. Post this, taxes are applicable on 70% of profits which should lead to higher overall tax rate of 29%in FY13 vs 25.7% currently.

Refunds due from Maharashtra government on account of VAT are on track. Out of Rs 11billion receivable as of June 2011, company received Rs 8.6 billion during Q2 and would receive Rs 2.4 billion in Q3FY12. Amount of Rs 2.95 billion pertaining to Q3FY12 is expected to be credited by end of December 2011.

NCCD (National Calamity Contingency Duty) claim of Rs ~110million per quarter (Rs 780 million for FY11) is under dispute with the government. The matter has been referred to the High court.

Management plans to introduce KTM bikes in the domestic market from January 2012 and completely upgraded Pulsar series from February 2012 onwards.

Company maintains its capex target of Rs 5 billion cumulatively for FY12 and FY13.

Exports of KTM bikes to Europe stands at 8,000 units year-till-date with revenues of Rs 700 million.

Revision in estimates:

We retain our FY12/13 to 4.5 million/5.1 million units (marginally upgrade by 0.6%/0.7%). Our EPS estimates is revised upwards by 13.5%/13.4% in FY12/13 to Rs 112.4/130.1 due to higher currency/export incentives/realization. We have modeled our FY12/13 estimates at Re/USD of Rs 47 (earlier Re 46.2/Re 45.2 for FY12/13) resulting in EPS increase of Rs 2.6/6.9. We have factored in export incentive at 9.5%/8% vs earlier est of 5%, resulting in EPS upgrade of Rs 6.5/Rs 5.1 for FY12/13. Pricing/Volume/Higher tax rate contribute EPS of Rs 4.2/Rs 3.5 for FY12/13.

Valuations and View:

Based on our revised estimates, the stock trades at attractive valuations of 15.1/13x PER and 10.3x/8.3x EV/EBIDTA on our FY12/FY13 est. Given the high cash flow generation and strong ROCE of above >60%, we find stock attractive. We upgrade our rating to Buy on the stock and raise our target price to Rs 2,210 based on 17x FY13 EPS est. of Rs 130.1.

Hold Bajaj Auto; target Rs 1,572

BAL has overall volume growth of 16.3% YoY at 1.16 million units with motorcycles (~88% of volumes) and three-wheelers witnessing 16% QoQ growth. Though volume growth looks strong, on introspection of the same it reflects a weak domestic market performance in both two wheelers (~9% YoY growth) and 1% decline YoY in the three-wheeler segment.

This is the lowest among all its major domestic competitors. It has been rescued by export growth (up 38% YoY) at 0.42 million units. DEPB has been removed. In line with this, BAL has hiked prices in the exports market to cover the impact.

The launch of the new Boxer-150 cc has received a warm response in rural markets. The new launches in Q4FY12E are being touted to help increase volume growth in the domestic market. However, we do not share the same enthusiasm with increasing competition and capacities from other competitors.

Valuation:

Slow domestic offtake is a major concern as export vulnerability in an uncertain global scenario remains a perspective that the market has not yet factored into valuations. The positive remains in terms of softening commodities and depreciating INR as margins continue to hold ~19-20%. At the CMP of Rs 1,698, the stock is trading at 15.6x FY13E EPS of Rs 108.4. We have valued the stock at the P/E of 14.5x FY13E EPS to arrive at Rs 1,572 a share. We recommend our `Hold` rating on the stock.

Accumulate` Bajaj Auto revised price target Rs 1,666

BAL`s 2QFY12 results were above expectations with the company reporting strong operating margins of 20.1%.



Adjusted earnings for the quarter grew by a strong 16% YoY.

Company expects volume growth of 16-17% during the year. Softening raw material prices could be positive for the margins, going forward.



We are revising our FY12 earnings upwards by 10% and introducing FY13E estimates. We expect the company`s earnings to grow at a CAGR of 14% over FY11-FY13E.



We roll forward our valuation on FY13 estimates now. We value the stock the stock at 14x (in line with valuation multiple assigned to Hero Motocorp) and arrive at a revised price target of Rs 1,666 (earlier Rs 1,464 based on 15x FY12 earnings). We maintain our `Accumulate` rating on the stock.

Valuation:



Company expects volumes to remain strong. New launches lined up in 4QFY12 and the recently launched Boxer is expected to help the company improve domestic performance.

Depreciation of rupee, price hikes and softening raw material could provide positive trigger to the margins going ahead.

At the CMP of Rs 1,614, the stock trades at 15x and 13.6x its FY12 and FY13 expected earnings respectively. We roll forward our valuation on FY13 estimates now.

We value the stock the stock at 14x (in line with valuation multiple assigned to Hero Motocorp) and arrive at a revised price target of Rs 1,666 (earlier Rs 1,464 based on 15x FY12 earnings). We maintain our `Accumulate` rating on the stock.

Buy Bajaj Auto; target Rs 1,850

The success of Pulsar135 and Discover twins (100cc and 150cc) has validated Bajaj Auto`s brand-centric strategy. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In an attempt to further leverage these brands, Bajai Auto recently launched Discover125cc and is all set to launch Pulsar250cc in Dec`11. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12E and 11.9% in FY13E.

What will move the stock:

1) The two-wheeler industry is less sensitive to current macro headwinds. We expect Bajaj Auto to maintain market share with domestic volume growth of 16%, in line with the industry. 2) The company is expected the take price hikes to counter the drop in export benefits from 9% under the DEPB scheme to 5.5% under the new drawback scheme. The rupee depreciation will also benefit the company. We expect exports to touch 1.4 million in FY12. 3) The company recently launched Boxer-150, thus reviving the Boxer brand, which is targeted at the rural segment (where Hero MotoCorp is the dominant player) and 4) With continued contribution from three wheelers and the high margin motorcycles, we expect BJAUT to restrict contraction in margins to 70bps in FY12.

Where are we stacked versus consensus:

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs 123.3, respectively. We have a `BUY` recommendation on the stock with a target price of Rs 1,850 discounting FY13E earnings at 15x. Our FY12 earnings estimate is 8.5%higher than the consensus estimate of Rs 99.06.

Challenge:

1) Significant increase in prices of commodities such as steel and rubber might exert pressure on margins.

Buy Bajaj Auto; target Rs 1,850

The success of Pulsar135 and Discover twins (100cc and 150cc) has validated Bajaj Auto`s brand-centric strategy. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In an attempt to further leverage these brands, Bajai Auto recently launched Discover125cc and is all set to launch Pulsar250cc in Dec`11. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12E and 11.9% in FY13E.

What will move the stock:

1) The two-wheeler industry is less sensitive to current macro headwinds. We expect Bajaj Auto to maintain market share with domestic volume growth of 16%, in line with the industry. 2) The company is expected the take price hikes to counter the drop in export benefits from 9% under the DEPB scheme to 5.5% under the new drawback scheme. The rupee depreciation will also benefit the company. We expect exports to touch 1.4 million in FY12. 3) The company recently launched Boxer-150, thus reviving the Boxer brand, which is targeted at the rural segment (where Hero MotoCorp is the dominant player) and 4) With continued contribution from three wheelers and the high margin motorcycles, we expect BJAUT to restrict contraction in margins to 70bps in FY12.

Where are we stacked versus consensus:

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs 123.3, respectively. We have a `BUY` recommendation on the stock with a target price of Rs 1,850 discounting FY13E earnings at 15x. Our FY12 earnings estimate is 8.5%higher than the consensus estimate of Rs 99.06.

What will challenge our target price:

1) Significant increase in prices of commodities such as steel and rubber might exert pressure on margins.

Accumulate Bajaj Auto; target Rs 1,644

BJA reported a 13.7% YoY growth in two-wheeler sales and a 15.6% YoY growth in the three-wheeler segment for the quarter, including exports. Average realization/vehicle is expected to be flat QoQ. EBITDA margins are likely to improve 30 bps QoQ on account of operating leverage. Other income is likely to remain flat QoQ, resulting in a decline of 10% YoY.

Buy Bajaj Auto; target of Rs 1,636

The new framework:

In the new framework, duty rates have been effectively capped at 5.5% for motorcycles sold in any form (CKD/SKD/CBU*). The Cenvat facility remains available in the new regime but incentive rates would remain constant against the earlier regime where rates were propped up 1%.

Could price hike dent export volumes

The BAL management has given a clear indication towards price hikes in export markets to the tune of 3-4% to mitigate the impact of the DEPB regime. Though we see a favourable currency movement in INR providing some relief, on a stable basis price hikes in exports markets could temper the furious growth (34% YTD) witnessed till now.

Potential financial impact:

In line with our earlier estimates, EBITDA margins would be expected to come off 70-80 bps from the 20% range with the assumption of major cost pass through via price hikes. However, in case that assumption proves otherwise, further 50-80 bps declines could come through.

Valuation:

Domestic volumes have been slow. However, with the new Pulsar and Boxer series, we expect H2FY12E to be better. At the CMP of Rs 1,550, the stock is trading at 13.3x FY13E EPS of Rs 116.8. We have raised our target P/E multiple to 14.0x to arrive at Rs 1,636 a share. We are changing our rating on the stock from BUY to HOLD.

 

Buy Bajaj Auto; target Rs 1,955

 Bajaj Auto (BJAUT), strong demand outlook, with focus on Pulsar and Discover brands and with increased rural penetration (launching Boxer 150cc) to boost volumes (20% growth in FY12E) and market share (Jul`11 market share- 33%).

Strong domestic demand outlook

Strong demand outlook, led by growth in domestic market and strong export momentum. The company`s YTD total sales in Motorcycles and 3-W grew at 16% and 27% resp. We estimate volume growth of 20% for FY12E. (management`s guidance is 20% for Y12E). Increasing mix of 3-W augurs well on the margin front (30%+ operating margins).

Focus on Pulsar, Discover brands and Pantnagar plant ramp up to boost margins

Focus on Discover and Pulsar (its most profitable brands) due to their strong brand recollect and then roll out subsequent models under these mother brands would improve product mix. Also higher operating leverage and ramp up at Pantnagar plant (which enjoys fiscal incentives) would offset cost push and help sustain margins at higher levels. We estimate EBITDA margin at 19% for FY12E.

New launches to boost market share

Bajaj Auto has 2 new launches in pipeline viz the 150cc boxer in Oct`11 and all new Pulsar in Sep`11. Success of Boxer 150 cc, would be critical for BJAUT to penetrate rural markets and could be a key growth driver. New Pulsar would be key for Bajaj Auto to defend its leadership in premium Segment.

Significant Free cash flow generation

Significant Free Cash flow generation as the Company generated cash of Rs 48 billion (treasury income will be around 380cr) in FY11 and will generate 65 billion (treasury income will be around 5 billion) in FY12. Excess cash will be used to invest in fixed income also hinted at a liberal dividend policy this year.

Valuation & Outlook

Our target price of Rs.1,955 is based on PE of 17x FY13E EPS of Rs.115.0. The Stock is currently trading at 16x FY 12E and 14x FY 13E.

Buy Bajaj Auto; target of Rs 1,665

With the success of Pulsar 135 and Discover twins (100cc and 150cc), Bajaj Auto`s brand-centric strategy has been validated. In its attempt to leverage these brands, Bajai Auto recently launched Discover 125cc and is all set to launch Pulsar 250cc in Sep`11. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In addition, continued demand for 3-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12 and 11.9% in FY13.

What will move the stock?

1) Despite rising macro headwinds, we expect Bajaj Auto to be less sensitive to such concerns. Given a slew of product launches in the near future, Bajaj Auto would be able to maintain market share with domestic volume growth of 16%, in line with industry growth. 2) Export outlook continues to be stable with total exports expected to touch 1.4 million in FY12. 3) Management expects to improve market share with growth of 22% to 4.8 million units during FY12 as against our volume estimate of 4.5 million units. 4) Increased proportion of high-margin motorcycles and continued contribution of three-wheelers would enable the company to tide over the input cost pressures and restrict the contraction in margins to 70bps 5) Opening up of new permits for three wheelers in Karnataka would be a further boost to domestic sales 6) The company is in the process of reviving the Boxer brand with a 150cc motorcycle especially targeted at the rural segment wherein Hero MotoCorp is the dominant player.

Where are we stacked versus consensus?

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs123.3 respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,665, discounting FY13E earnings at 13.5x. Our FY12 earnings estimate is 6.1% higher than consensus estimate of Rs101.3.

What will challenge our target price?

1) Significant increase in prices of commodities such as steel and rubber are likely to pressurise margins.

2) The company draws significant benefits from the DEPB scheme and withdrawal of the same would impact profitability. In case the incentive is entirely withdrawn, our earnings estimate would reduce 10%.

Hold Bajaj Auto; target of Rs 1572

Bajaj Auto’s results were marginally below expectations due to pressure on margins led by increased raw material costs and lower realisation due to changing product mix.

Bajaj Auto Limited (BAL) registered highest ever sales volume for both motorcycles and three wheelers (18% YoY). BAL reported 22.7% YoY and 13.2% QoQ increase in net sales to to Rs 4,586.9 Crs which was driven by 17.7% growth in volumes. Revenue from exports in Q1FY12 stood at Rs 1,688 crs Vs Rs 1,210 crs in Q1FY11, up 40% YoY. Higher volumes and focus on high end motorcycles helped the company to declare an EBITDA margin of 19.9% which was the best in the industry. BAL reported a 20.5% YoY and 5.2% QoQ jump in adjusted net profit to Rs 711.1 crs in Q1FY12 which was impacted due to lower other income but was benefited by lower tax rate on the back of higher share of Panthnagar production.

Management has maintained FY12 volume guidance at 20% (led by volume momentum both in domestic and exports markets). Management has also guided for a total capex of Rs 500 for FY12- FY13. The company plans to target the rural market by launching Boxer 150cc in the domestic market in August 2011. Bajaj Pulsar sales were 156,000 in Q1FY12 Vs 185,000 in Q1FY11 which was due to tepid response to Pulsar 135cc variant in the domestic market. However, it did well in the export market.

At the current market price of Rs 1,485 per share, BAL is currently trading at a PE of 14.6x FY12E and 13.1x FY13E earnings, which looks fairly valued. Using DCF valuation we have arrived at an intrinsic price of Rs 1572 per share. Given our target price, we maintain our HOLD rating on the stock and expect a limited upside from current levels.

Buy Bajaj Auto; target Rs 1,680

Momentum in three exports and three wheelers to sustain. Expect new permit opening to drive domestic three wheelers in FY12. Boxer will be positioned to create a new segment. However, some cannibalization with Platina is not ruled out.

Revision in estimates:

Given the strong performance in 3 wheelers and exports with improved visibility for the remaining FY12, we increase our overall volume estimate by 1.4%/1.5% in FY12/13 to 4.47 mn/5.09 mn units. Hence, our net revenue estimates stand revised upwards by 2.2%/2.3% in FY12/13. We lower our EBITDA margin estimates by 50 bps /40 bps in FY12/13 to 18.0%/17.9% due to higher cost pressures and adverse product mix. Also, we have lowered our other income on assumption of lower cash flows (higher loans and advances). Effective tax rate stand revised to 26.5% due to higher profit contribution from Pantnagar.

Valuations & View:

Based on our revised estimates, the stock trades at attractive valuations of 14.6x/12.6x PER and 9.8x/8.2x EV/EBIDTA on our FY12/FY13 est. Given the high cash flow generation and strong ROCE of above >60%, we find stock attractive. We retain our `Buy` on the stock but lower our target price to Rs 1,680 based on 15x FY13 EPS est. of Rs 112.1.

Hold Bajaj Auto; target Rs 1,447

Bajaj Auto is facing an uphill task of balancing growth with margins. While the management is quite vocal on protecting margins even at the cost of growth, we believe that the company is changing its stance to achieve a more balanced growth even if it leads to sacrificing margins. The `Boxer` will play the lead role in this balancing act. While it may help the company in achieving 20% plus volume growth, we see margins eroding to sub 19% levels in FY2012.

We are reducing our estimates for FY2012 and FY2013 by 2.5% and 5% respectively to factor in lower than expected margins. We expect the motorcycle product mix to deteriorate on account of higher contribution from the Boxer. We will also wait and watch the pricing strategy in the export market post the withdrawal of the DEPB benefits. Consequently, our estimates stand revised downwards to Rs 100.6 and Rs 115.7 for FY2012 and FY2013 respectively. On account of limited upside from the current levels, we downgrade the stock to Hold with a revised target price of Rs 1,447 (12.5x FY2013E earning per share [EPS]).

Buy Bajaj Auto; target Rs 1,665

With the success of Pulsar135 and Discover twins (100cc and 150cc), Bajaj Auto`s brand-centric strategy has been validated. In its attempt to leverage its highly successful `Pulsar` and `Discover` brands Bajai Auto recently launched Discover125cc and is all set to launch Pulsar 250cc in September`11. These high-margin brands now account for 70% of the company`s motorcycle sales. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12 and 11.9% in FY13.

Drivers

1) Despite rising macro headwinds, we expect Bajaj Auto to be less sensitive to such concerns and the slew of product launches in the future would help the company maintain its market share with domestic volume growth of 16%, in line with industry. 2) Export outlook continues to be stable with total exports expected to touch 1.4mn in FY12. 3) Management expects to improve market share with growth of 22% to 4.8mn units during FY12 as against our volume estimate of 4.5mn units. 4) Increased proportion of high-margin motorcycles and continued contribution of three-wheelers would enable the company to tide over the input cost pressures and restrict the contraction in margins to 70bps 5) The DEPB export incentive was extended by three months up to end Sep`11 post which incentive in the form of duty drawback are expected to continue with a reduced rate of 4-5%. With price increases in the export markets and better cost efficiency, management expects to maintain margins.

PINC estimates versus consensus

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs123.3 respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,665, discounting FY13E earnings at 13.5x. Our FY12 earnings estimate is 6.1% higher than consensus estimate of Rs 101.3.

Challenge to target price

1) Significant increase in prices of commodities such as steel and rubber are likely to increasingly pressurise margins. 2) The company draws significant benefits from DEPB export benefit scheme and in case the scheme is entirely withdrawn our earnings estimate would reduce to the tune of 10%.

Buy Bajaj Auto; target of Rs 1590

Bajaj Auto is the largest exporter of two and three wheelers and the company has a technical tieup with Kawasaki Heavy Industries of Japan. Company’s Distribution network covers 50 countries with dominant presence in Sri Lanka, Bangladesh, Columbia, Guatemala, Peru, Egypt, Iran and Indonesia. Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 41% over 2010 to 2013E respectively. During the quarter, the company has reported revenue increased to Rs 47772.90 million for the quarter ended. Exports of the company for June, 2011 stood at 142124 from 114024 of the corresponding month of the previous year i.e., an increase of 25%.

During the quarter, the company disclosed a standalone profit of Rs 7110.60 million as against of Rs 5901.50 million for the quarter ended June 30, 2010. Net sales are increased by 23% to Rs 47772.90 million from Rs 38900.60 million in the same quarter previous year. In the same period, standalone total income of the company was at Rs 48503.80 million, a rise of 22% over the prior year period. Company EPS is stood at Rs 24.57 for the quarter ended June2011.

At the current market price of Rs 1407.25, the stock is trading at 10.07 x FY12E and 8.50 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs 139.77 and Rs 165.53 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 41% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 8.44 x for FY12E and 7.97 x for FY13E. Price to Book Value of the stock is expected to be at 4.55 x and 2.96 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs 1590 for Medium to Long term investment.

Accumulate Bajaj Auto; target Rs 1,530

Operational performance below expectation: Bajaj Auto (BJA) reported 22.8% YoY improvement in its top-line at Rs 42.8 billion, mainly on account of 17.7% YoY volume growth and 4.3% YoY realization growth. On a sequential basis, the topline grew by 13.6% mainly on account of 15.3% QoQ improvement in volumes. However, blended realisations were lower by 1.3% QoQ mainly on account of a more than 2% QoQ decline in average/realisation in the domestic market. This could be attributed to the unfavourable product mix skewed towards executive and entry level motorcycles (125cc `Discover` accounted for 16.6% of domestic volumes in Q1FY12). As a result, raw material / total income ratio increased by 170bps QoQ, thereby impacting the EBITDA margins by 140bps QoQ at 19.1%. Absolute EBITDA grew by 17.2% YoY at Rs 9.1 billion, whereas PAT grew by 20.5% YoY at Rs7.1bn mainly on account of lower tax rate which stood at 25.4% (compared to 28.6% in Q1FY11).

Robust Export growth continues: Export volumes for the quarter grew at 32% YoY whereas the average realisation/vehicle was up 5.7% YoY. As a result, export revenues for the quarter were up 40% YoY at Rs16.9 billion, thereby accounting for 35% of the turnover of the company.

Our volume estimates: We expect the two wheeler volumes to grow by 14.3% YoY at 3.87mn in FY12E mainly driven by 20% YoY growth in the export volumes at 1.16mn. We expect the 3-wheeler volumes to grow at 14.5% YoY at 0.5mn in

FY12E.

Outlook & Valuation: BJA has taken a price increase of 1.5-2% across the board during May`11. This coupled with the fact that the raw materials have stabilised, make us believe that the margins would improve going forward. At the CMP, the stock is trading at 14.3x FY12E EPS and 12.6x FY13E EPS, which in our view is fair. We maintain our `Accumulate` call on the stock.

Buy Bajaj Auto; target Rs 1,466

Bajaj Auto`s Q1FY2012 revenue came in at Rs 47,773 million, indicating an increase of 23% year on year (YoY) and of 13.7% quarter on quarter (QoQ). The net realisation declined by 1.3% QoQ despite price hikes of 2-3% effected in the domestic market in April 2011 and in the export markets in May 2011. An unfavourable product mix within the motorcycle segment affected the realisation wherein the contribution of the 125cc+ bikes declined from 46% in Q4FY2011 to 43% in Q1FY2012.

In Q1FY2012 the contribution per vehicle declined by Rs 904, which was the lowest in the last four quarters. The raw material cost/sales increased by 140 basis points YoY and by 168 basis points QoQ as commodity cost pressure continued and price hikes were taken selectively. However, the management continued its prudent cost management efforts wherein the employee expenses/sales declined by 30 basis points YoY and by 20 basis points QoQ. Consequently, the operating profit margin (OPM) came in at 19.1% (lower than the expectation of 19.8%).

The other income at Rs 730 million was lower than our expectation of Rs 1.15 billion. The tax rate came in at 25.4%, the lowest in the last eight quarters, primarily on account of higher production from the Pantnagar plant. The capacity at the Pantnagar plant, which produces the Discover and Platina brands, has been increased from 1.2 million units to 1.8 million units. The profit after tax (PAT) grew by 20.5% YoY to Rs 7,116 million (which was lower than our expectation of Rs 7.51 billion).

Since the launch of the new Discover 125cc in April 2011, the company has increased its overall domestic market share in the motorcycle segment from 24% to 26.5%. Moreover, the company is planning to launch the new Boxer 150cc in August 2011, which will be followed by the launch of Duke in H2FY2012. Going forward, we expect the company`s market share to improve further, driven by the recently launched Discover 125cc and the yet to be launched Boxer 150cc. The management is targeting a 30% plus market share in the medium term.

Outlook & Valuation:

Though the Q1FY2012 results of Bajaj Auto were below our expectation, the company`s management commented that the raw material contracts for Q2FY2012 will remain stable. Going forward, the margins are likely to remain at the current levels as the company had also taken price hikes in the export markets effective from May 2011. The management indicated that it is not contemplating any further price hike in the domestic market, but the export market could see further price hikes if the benefits under the Duty Entitlement Pass Book scheme expire in September 2011. Currently we have a `Buy` recommendation on the stock and will review our estimates after the conference call with the company`s management.

Buy Bajaj Auto; target Rs 1,700

Net sales - disappoint expectations by ~3%: Net sales at Rs 47.8bn (22.8% YoY, 13.7% QoQ) came below our est. of Rs 49.3bn. Average selling price (ASP) at Rs 41,973 (+4.3% YoY/ -1.8% QoQ) against our est. of Rs 43,479. 2.2% QoQ drop in domestic ASP is the key reason of disappointment.

EBIDTA - lower topline affects the performance: EBITDA of Rs 9.1bn (margin of 19.1%) was ~9.5% lower than our est of Rs 10bn (margin of 20.4%). Margins were primarily impacted by higher RM/sales at 72.6% (170 bps QoQ) against our est. of 71.3%. Staff costs at 2.9% of sales and other expenses at 5.5% of sales were in line with our est.

APAT at Rs 7.1 bn vs our est. of Rs 7.8 bn: Adjusted net profits at Rs 7.1bn were impacted by lower top line and lower other income. Other income at Rs 731 mn was lower than our est. of Rs 1bn. However, the company benefited from lower effective tax rate of ~25.4% against our est. ~27% which partially offset the decline.

Valuations and view: At Rs 1,421 the stock trades at PER of 14.6x/12.6x and EV/EBIDTA of 10.1x/8.4 x our FY12/13 estimates respectively. Our FY13 estimates already factor in risk of DEPB withdrawal and hence possess limited downside risk. We shall further update post the conference call scheduled on 18th July. We retain our BUY rating.

Accumulate Bajaj Auto; target Rs 1,550

Bajaj Auto reported a 16.3% YoY growth in two-wheeler sales and a 30.0% YoY growth in the three-wheeler segment for the quarter, including exports. Average realization/vehicle is expected to be higher QoQ on account of 1.5-2% price hike undertaken across the segments. EBITDA margins are likely to decline by 70bps QoQ on account of only partial pass on of the raw material increase.

Accumulate Bajaj Auto; target Rs 1,610

Bajaj Auto (BAL) reported in-line volume growth of 16.2% yoy and 2.2% mom to 366,657 units. Volume growth was led by 14.2% yoy and 1.5% mom growth in the motorcycle segment and a 34.4% yoy and 7.3% mom increase in the three-wheeler segment.

Pulsar and Discover accounted for 66% of the overall motorcycle sales, with Discover registering 133,000 units and Pulsar reporting 81,000 units. The three-wheeler segment recorded robust 34.4% yoy growth to 43,830 units. BAL`s exports continue to show strong traction, reporting 24.6% yoy and 12.1% mom growth to 142,124 units.

At Rs 1,421, the stock is trading at 14.2x FY2012E and 13.2x FY2013E earnings. We recommend `Accumulate` on the stock with a target price of Rs 1,610.

Short Bajaj Auto June Future; target of Rs 1280

The recent pullback in Bajaj Auto from the low of Rs 1,306, which coincided with the lower band of Envelope fizzled out near its 200-DMA yesterday, as despite an intra-day high of Rs 1,444, we saw the stock closing below its Friday’s low. Historically, the stock has several times ran into its 200-DMA line and fallen back. Moreover, appearance of falling tops signifies the bulls inability to form higher highs. A fall below Rs 1,340 could signal a trend reversal after recent pullback. We advise going short on Bajaj Auto June Futures below Rs 1,340 with stop loss of Rs 1,365 for target of Rs 1,280.

Buy Bajaj Auto; target Rs 1,664

With success of Pulsar135 and Discover twins (100cc and 150cc), Bajaj Auto`s brand-centric strategy has been validated. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 16.2% in FY12 and 11.9% in FY13.

Drivers

1) Despite increasing competition, we expect Bajaj Auto to maintain its market share with domestic volume growth of 16%, in line with industry growth. With three variants, the Discover is the second largest selling brand in India. 2) Export outlook continues to be stable with total exports expected to touch 1.4 million in FY12. 3) Management expects to improve its market share with growth of 22% to 4.8million units during FY12 as against our volume estimates of 4.5million units. 4) Increased proportion of high-margin motorcycles and continued contribution of three-wheelers would enable the company to tide over the input cost pressures and restrict contraction in margins to 70bps 5) Export incentives in the form of duty drawback, albeit at a lower rate (4-5% vs current 10%), are expected to continue once extended deadline for DEPB scheme expires. However, with price increases in the export markets and increased cost efficiency, management expects to maintain margins.

PINC estimates versus consensus

Our FY12 and FY13 earnings estimates are Rs 107.5 and Rs 123.3 respectively. We have a `BUY` recommendation on the stock with a target price of Rs 1,664, discounting FY13E earnings at 13.5x. Our FY12 earnings estimate is 3.7% higher than consensus estimate of Rs 103.7.

Challenge to target price

1) Steep increase in prices of commodities such as steel and rubber would pressurize margins. 2) In case of no further extension of DEPB scheme and no alternate incentives provided by the government, there is a 10% downside to our earnings estimate.

Buy Bajaj Auto; target Rs 1,466

DEPB gets extension; new duty drawback scheme likely to be introduced soon: The Duty Entitlement Pass Book (DEPB) scheme is all set to get another extension for three months till September 2011. The finance ministry has said that formal notification will be announced soon and has agreed to extend the scheme on the condition that this would be the last extension and a new scheme would be worked out to replace DEPB by that period.

DEPB is an export incentive scheme under which the government provides import duty credit entitlement to the exporters. It is calculated as a fixed percentage of the free-on-board (FOB) value of the exports. Companies sell these import duty certificates to the other importers and book the realisations as operating income. For Bajaj Auto, the current rate for DEPB benefits is 9% of the FOB value of its exports.

Duty drawback scheme likely to be increased: There is an alternative scheme, the duty drawback scheme that the companies can still avail of. The DEPB scheme has been preferred by most companies as it offers a much higher benefit (9% in case of Bajaj Auto) over the duty drawback scheme (1% for Bajaj Auto). Consequently, the government has now set up an expert committee for consultation with the industries and to recommend an appropriate rate (likely to be higher than the current 1%) for the duty drawback scheme. The new rates for duty drawback will be approved before the DEPB scheme finally comes to an end in September 2011.

Bajaj Auto likely to have a marginal impact: Bajaj Auto exports about 30% of its total volumes to Africa, Latin America and South East Asian countries. The management feels that the duty drawback scheme might be increased to 4-5%, which is in line with the industry expectation. Further, to mitigate the impact of the remaining loss from the end of the DEPB scheme, the management plans to pass about 2% to its dealers in the export countries and another 2% as price hikes.

About 90% of FY2012 export receivables are hedged at Rs 47, which will take care of any losses if the rupee appreciates. The company has also started taking covers for FY2013 as well. We are building a conservative export volume target for FY2012 at 1.3 million units against the management`s target of 1.5 million units.

Maintain `Buy`: We maintain our estimates for FY2012 and FY2013 and await further clarity on the new duty drawback scheme. We maintain our `Buy` recommendation on the stock with a price target of Rs 1,466.

Buy Bajaj Auto,targetRs 1,664

Bajaj Auto dispatches for the month of May`11 were ahead of our estimates. The company reported a growth of 19.8% YoY to 359k units as against our expectation of 330k units. Motorcycle dispatches stood at 318k units, up 18% YoY. The Pulsar dispatches were at 75k units while Discover was at 139k units. Three wheeler dispatches were higher by an impressive 36.4% to 41k units.

Exports during the month were higher by 14% YoY to 127k units. However, on a MoM basis exports were lower by 20% as the April exports also included 32k units which were in transit at the year end. Adjusting for the same exports were flat MoM.

We maintain a `Buy` recommendation on the stock with a target price of Rs 1,664 discounting FY13E earnings 13.5x.

Hold Bajaj Auto; target of Rs 1401

Bajaj Auto Limited (BAL) registered highest ever sales of commercial vehicles in the domestic market. Net sales in FY11 stood at 15,998 Crs, a jump of 39%. In Q4 FY11 it grew 23.2% on a YoY basis and 0.6% on a QoQ basis to Rs 4,051.7 Crs Crs driven by 17% growth in volumes.

Net profit rose by a robust 165.2% to Rs 1,400 Crs on the back of extraordinary items amounting to Rs 724 crs. The company prepaid a sales tax incentive loan from the Government of Maharashtra at a discounted value resulting in a gain of Rs 827 Crs. Also, investment in the Indonesia subsidiary was written off to the extent of Rs 102 Crs. Excluding the above mentioned items, adjusted net profit stood at Rs 675.9 crs for Q4FY11 and Rs 2,615.2 crs in FY11.

BAL Management has mentioned that there has been an addition of 130 dealers from April 2011 onwards that represent additional dealers in existing location. We believe that the increased sales force will have a positive impact on the overall volumes for the year. Management expects its advertisement expenditure to increase marginally in absolute terms; however, it is expected to remain stable as % of sales. Management has guided for a total capex of Rs 2.5bn for FY12 and FY13 each.

At the current market price of Rs 1,330 per share, BAL is currently trading at a PE of 13.3x FY12E and 12.1x FY13E earnings, which looks fairly valued. Using DCF valuation we have arrived at an intrinsic price of Rs 1401 per share. Given our target price, we maintain our HOLD rating on the stock and expect a limited upside from current levels.

Buy Bajaj Auto; target Rs 1,545

Bajaj Auto reported a 23.5% year on year (YoY) revenue growth at Rs 42 billion led by a 17% YoY volume growth and a 9% YoY realisation growth. On a quarter on quarters (Q-o-Q) basis, realizations improved marginally by 0.4%, led partially by price hikes taken in March 2011 and a better product mix.

The Q4FY2011 contribution per vehicle at Rs 12,900 improved by Rs 285 per vehicle sequentially (against our expectation of an improvement of Rs 126 per vehicle) and by Rs 1,328 YoY on the low base of the corresponding previous year quarter. On account of a 40 basis point increase in the three wheeler mix sequentially, the contribution margins have improved. Going forward, on the raw material front, the company does not see any serious cost pressures with the exception of a possible rise in tyre and nickel prices. The staff cost saw a substantial increase of 21.6% QoQ; whereas other expenses saw a moderation. Overall there was a marginal 20 basis point sequential improvement in the operating margin at 20.5% (better than our expectation of 20.1%). The management met its guidance of 20% operating margin for FY2011.

Bajaj Autos Q4FY2011 performance at the operating level was broadly in line with our expectation. However, a higher than expected other income (highest for any quarter) and a lower than expected depreciation boosted Q4FY2011`s adjusted profit after tax (PAT), which came 4% higher than our expectation at Rs675.8 crore.

We are prima facie positive on the results. However, the key risk remains the unlikely extension of the duty entitlement pass book (DEPB) scheme by the finance ministry beyond June 30, 2011, which could be a major overhang on the stock. Currently we have a `Buy` recommendation on the stock. We will review our estimates in a detailed note post the conference call.

Buy Bajaj Auto; target Rs 1,650

Net sales at Rs 42 billion (23.5% YoY, 0.5% QoQ) came broadly in line with our est. of Rs 42.3 billion. Average selling price at Rs 42,734 increased by 5.1% YoY and 0.4% QoQ against our est. of Rs 43,321 EBIDTA at Rs 8.6 billion vs our est. of Rs 8.5 billion EBITDA margins at 20.5% came ahead of our est. of 20%. While RM/sales declined 50 bps QoQ to 70.9%, higher staff costs at 3.1% of sales (our est, of 2.7%) partially offset the decline.

Adjusted net profits at Rs 6.75 billion were marginally above our est. of Rs 6.6 billion primarily due to better operating performance and slightly lower tax rate. The company reported one time gain of Rs 8.3 billion representing surplus on prepayment of sales tax deferral loan. Company had a payment of Rs 3.7 billion. It also recorded diminution in value of its investment in Indonesia (Rs 1 billion).

At Rs 1,287, the stock trades at PER of 12.1x and EV/EBIDTA of 7.8 x our FY12 estimates respectively. Even after lowering the earnings for DEPB impact (10%), the stock trades at a PER of 13.5x and EV/EBIDTA of 9x our FY12 estimate. We would revise our earnings estimates post discussion in tomorrow's conference call. Key risk arises from below than expected volumes given the disappointing domestic performance in last 2 months.

Sell Bajaj Auto; target of Rs 1400-1370

Bajaj Auto, after a brief mixed tone near the resistance level of Rs 1482 prices witnessed selling pressure and ended the session sharply lower in yesterday’s session. The 14-day RSI is turning down after showing negative divergence while the Stochastic (14/3/3) has made a bearish crossover and is easing out of the overbought territory. This could keep the prices on a sideways to weak note towards the 55-day EMA 1407 and then the support zone of Rs 1363/1340 in the forthcoming sessions. From wave perspective also prices seem to have completed a double combination corrective pattern which would add to aforesaid argument of weakness.

On the higher side, resistance is likely to be seen at Rs 1454 and then near Rs 1482 on any immediate bounce back. Sell 50% at CMP Rs 1441 and

then on any rise to Rs 1461, with a closing stop of Rs 1485 for a target of Rs 1400/1370.

Buy Bajaj Auto; target of Rs 1482/1500

Bajaj Auto, prices are in a short-term down trend from the recent high of Rs 1482 however have given a decent bounce back after testing the 55-day EMA in Wednesday’s session. However the intermediate-term trend (from February lows) is still up and historically any pull back within the same seems to be getting good support at the said moving average.

The 14-day RSI is hovering near the equilibrium while the very short-term Stochastic (5/3/3) has just made a bullish crossover near the oversold territory. Hence a break above immediate resistance near Rs 1410 could signal a turn around and keep the sentiment positive towards prior swing high of Rs 1482 and higher subsequently. Only an early close below the support zone of Rs 1363/1351 would turn the overall sentiment weak negating the upside potential. Buy Bajaj Auto initially above Rs 1410 and then on any dips to Rs 1400, with a target of Rs 1482/1500 and closing stop of Rs 1363.

Accumulate Bajaj Auto; target of Rs 1,464

BAL remains confident of carrying the growth momentum in FY12. After growing at 38% in FY11, the company expects 20% volume growth in FY12.

We expect 3-4 new launches planned by the company in FY12 will help them sustain the growth momentum. Discover model motorcycles will play a significant role in our view towards contributing additional volumes in FY12.

Export demand for both the motorcycle and the 3W stays strong.

Company will continue with its focus on maintaining strong EBITDA margins and preserving the 700bps lead over its peers margins.

New product launch schedule and addition of new dealership provides us with volume growth visibility. Add to that the company`s perseverance towards maintaining healthy margins augers well for the overall profit growth for BAL.

We remain positive on the stock and continue to maintain our price target of Rs 1,464. We rate the stock as Accumulate.

Accumulate Bajaj Auto; target of Rs 1,514

While commenting on the Q4 result preview, Prabhudas Lilladher said, BJA reported a flat volume QoQ in two-wheeler sales and a 2.8% QoQ de-growth in the three-wheeler segment for the quarter, including exports. Export volumes for two-wheelers declined by 8.8% QoQ on account of a delay in transit for the month of March 2011. Average realization/vehicle is expected to be higher QoQ on account of 1.5-2% price hike undertaken. EBITDA margins are likely to decline by 140 bps QoQ on account of only partial pass on of the raw material increase.

Accumulate Bajaj Auto; target of Rs 1,514

Commenting on the Q4 result preview: BJA reported a flat volume QoQ in two-wheeler sales and a 2.8% QoQ de-growth in the three-wheeler segment for the quarter, including exports. Export volumes for two-wheelers declined by 8.8% QoQ on account of a delay in transit for the month of March 2011. Average realization/vehicle is expected to be higher QoQ on account of 1.5-2% price hike undertaken. EBITDA margins are likely to decline by 140 bps QoQ on account of only partial pass on of the raw material increase.

Accumulate Bajaj Auto; target of Rs 1,610

Bajaj Auto (BAL) reported marginally lower-than-expected overall sales growth of 12.2% yoy (down 5.9% mom) to 307,738 units during March 2011. Volume growth was led by 12.1% yoy (down 4.3% mom) growth in the motorcycle segment, with Pulsar and Discover accounting for 71% of overall motorcycle sales.

The three-wheeler segment recorded 13.6% yoy (down 17.1% mom) growth to 33,349 units. BAL reported slightly muted exports growth of 7.3% yoy to 69,884 units. This was because of 32,000 units in transit, which would be reflected in April 2011. At Rs 1,458, the stock is trading at 15.1x FY2012E and 13.6x FY2013E earnings. We recommend an `Accumulate` rating on the stock with a target price of Rs 1,610.

Buy Bajaj Auto; target of Rs 1,649

Bajaj Auto (BJAUT) dispatches for the month of March 2011 were up 12% to 308,000 units against our expectations of 340,000 units.

The shortfall is due to lower exports to the tune of 32,000 units which are in transit and have not been accounted for in the current month. These transit exports will be accounted for in the April 2011 dispatches.

The total domestic sales were up 14% to 238,000 units while the exports reported a moderate growth of 7% to 70,000 units. BJAUT, with a focus on the commuter segment, launched.

Three-wheeler segment dispatches were higher by 14% to 33,000 units. Total volumes for FY11 were up 34% to 3.82 million units. The company has guided for 20% growth in volumes to 4.6 million units in FY12.

Company will be raising prices in April 2011 for its products in the domestic market while for exports market it is planning an increase in the month of May. We maintain a `Buy` recommendation on the stock with a target of Rs 1,649 discounting FY12E earnings 16x.

Buy Bajaj Auto; target of Rs 1,649

With the success of Pulsar 135 and Discover twins (100cc and 150cc), Bajaj Auto`s (Q,N,C,F)* brand-centric strategy has been validated. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 37.8% and 13.8% in FY11E and FY12E respectively. We expect profitability to be maintained at the current level of 20%.

1) Despite increasing competition, we expect Bajaj Auto to maintain its market share with domestic volume growth of 14%, in line with the industry. 2) Export outlook continues to be stable with total exports expected to touch 1.4mn in FY12. 3) Increased proportion of high-margin motorcycles and continued contribution of three-wheelers would enable the company to maintain margins at current levels. 4) Bajaj Auto is expected to launch the new Discover 125cc in Q1FY12. 5) Management expects to improve its market share with growth of 22% to 4.8mn units during FY12 as against our volume estimate of 4.5mn units.

Our FY11 and FY12 earnings estimates are Rs 88.8 and Rs103.1 respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,649, discounting FY12E earnings at 16x. Our FY12 earnings estimate is 1.5% higher than consensus estimate of Rs 101.6.

Significant increase in prices of commodities such as steel and rubber are likely to increasingly pressurize margins.

Buy Bajaj Auto with a price target of Rs 1,650

We expect company to grow at above industry rate in FY12 due to its increasing focus on semi-urban/rural market and `discover` family.

We expect exports to be a strong growth driver over next three years (upwards of 15% CAGR) on volumes as well as profitability due to the strategy of focusing on new markets and increasing market share in existing markets.

Contrary to the perception, we believe that recent changes in product mix (higher share of Pulsar 135 cc and Discover 100cc/150cc) will be margin remunerative.

Valuations

We have valued the stock at a target PER of 15.5x our FY12 estimates.

The key trigger in the stock will be positive surprise on three wheeler business.

While rising metal prices is a concern, given high EBITDA margin (20%) the impact of high metal prices will be lowest in our auto universe.

Sell Bajaj Auto; target of Rs 1260

With its recent up move Bajaj Auto has retraced back almost 38.2% of its fall from Rs 1564 to Rs 1190. Since last two days the stock has been testing its 55 DEMA and witnessing selling pressure leading to the formation of a Spinning candles after 4 days of continuous upmove. A breach below the candle low at Rs 1330 would lead to a breach of the steep rising channel of last 4 days indicating negativity towards Rs 1260-1250 zone.

Daily stochastic has moved up faster than prices and is testing over bought zone making prices vulnerable to correction. RSI having breached its bullish range with the fall of last few weeks, is now testing the upper end of breach range at 60 adding to our view of probable weakness According to wave structure prices have witnessed an five wave up move and thus a minimum three wave down move could be witnessed. Sell Bajaj Auto below Rs 1330 for a target of Rs 1260 with stop placed above Rs 1360 on closing basis.

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With the success of Pulsar135 and Discover twins (100cc and 150cc), Bajaj Auto`s  brand-centric strategy has been validated. The high-margin brands, Pulsar and Discover, now account for 70% of the company`s motorcycle sales. In addition, continued demand for three-wheelers and robust exports would help Bajaj Auto achieve volume growth of 37.8% and 13.8% in FY11E and FY12E respectively. We expect profitability to be maintained at current levels of 20%.

Drivers

1) Despite increasing competition, we expect Bajaj Auto to maintain its market share with domestic volume growth of 14%, in line with the industry. 2) Export outlook continues to be stable with total exports expected to touch 1.4mn in FY12. 3) Increased proportion of high-margin motorcycles and stable contribution of three-wheelers would enable the company to maintain margins at current levels. 4) Bajaj Auto is expected to make a new launch in the motorcycle space in Q1FY12 in association with KTM. 5) Management expects to improve its market share with growth of 22% to 4.8mn units during FY12 as against our volume estimates of 4.5mn units.

PINC estimates versus consensus

Our FY11 and FY12 earnings estimates are Rs 88.8 and Rs103.1 respectively. We have a `Buy` recommendation on the stock with a target price of Rs 1,649, discounting FY12E earnings at 16x. Our FY12 earnings estimate is 1.6% higher than consensus estimate of Rs 101.4.

Challenges to target price

Significant increase in prices of commodities such as steel and rubber are likely to increasingly pressurise margins. Any increase in excise duty would lead to downward revision in growth estimates.