Sunday, July 12, 2009


Upgrade to OW(V): Launch & margin increase to drive growth
  • Sales should be boosted by new launch on 18 July; expect it to focus on mileage, a concept with which buyers connect
  • Forex loss reduction and cheaper input costs to drive margins; EBITDA margin to increase by 530bp in FY10e
  • Upgrade to OW(V) from UW(V), raise TP to INR1,220 from INR412; roll forward our DCF to July 2009 from Jan 2009

Banking on the forthcoming launch. With bank financing drying up for consumers, Bajaj Auto has been losing market share to Hero Honda, as the profile of buyers who typically pay cash focus on mileage and resale value over power and styling. We believe Bajaj’s new motorcycle launch later this month will be focused on mileage, to which buyers can better connect. The company’s sales volume should also benefit from a low base. In ‘three- wheelers’, Bajaj is benefiting from replacement demand.

Margin expansion in FY10e. We believe EBITDA margin should expand from 12% in FY09 to 17.3% in FY11e. The reduction in top forex losses should contribute 3%, and the rest should come from raw material benefits and change in product mix. Accordingly, we raise our FY10e and FY11e EPS by 79% and 89% to INR91.4 and INR102.6 respectively.

Upgrade to OW(V). We raise our DCF-based one-year target price to INR1,220 from INR412 and upgrade our rating from Underweight (V) to Overweight (V). At our target price, the stock trades at 13.3x FY10e EPS of INR91.4 and 11.8x FY11e EPS of INR102.6, a 20% discount to its peers. Earlier, our target price implied a one-year forward PE multiple of 7x, which was a historical trough multiple. With the improvement in market sentiment, business prospects and profitability, we believe there is no longer a case for a historical trough valuation.

Catalyst and risks. We believe the launch of the new motorcycle should act as a trigger for the stock. Key risks are lower than expected performance of the new bike and exports, non-availability of bank financing and higher-than-expected input costs.

To see full report: BAJAJ AUTO