Sunday, November 2, 2014


Conference call takeaways

Bajaj Auto continued to record strong growth in 2QFY15 across most of its business segments, namely export markets (management expectations of 20% volume growth for FY15 driven by healthy growth across most of the export countries) and domestic three-wheelers (on the back of new permit
issuances from Hyderabad, and Delhi). Within domestic motorcycles, whilst Pulsar and Platina continue to do well, there are early signs of recovery in Discover sales (helped by launch of Discover 150). We retain our positive view on Bajaj Auto on the back of its strong and growing exports franchise, opportunity to regain market share in domestic motorcycles (market share perked up to 18.8% in September 2014 vs 16.6% in April-August 2014) and its diversified business model. We marginally upgrade our estimates (FY15 and FY16 net earnings by 3%/2%) and valuation to Rs2,600 (vs Rs2,500 earlier), implying 15.0x one-year forward net earnings.

Key takeaways from the earnings call
■ Domestic motorcycle industry: The management expects domestic motorcycle industry to witness 10-12% YoY growth in 2HFY15. The industry volume growth has been around 12% for Navratri. Furthermore, Diwali is also expected to witness a similar volume growth. Whilst Pulsar and Platina continue to clock healthy volume growth, the management is hopeful of recovering market share in Discover. The recently launched Discover 150 has seen a good opening and currently it retails around 25k units/month. Furthermore, the company plans to launch new variants of Platina and Pulsar by end-FY15.

■ Domestic 3W volumes: The domestic 3W volumes witnessed a strong growth of 39% YoY in 2QFY15. This was mainly driven by new permits as well market share gains for Bajaj in the diesel 3W segment (32% currently vs 25% last year). On the back of new permit issuances in Delhi and Hyderabad, the management expects to sustain a monthly run rate of 26k-27k units in the domestic 3W space for 2HFY15 (vs 22k units/month in 1HFY15 and 15k units/month in 2HFY14). Quadricycle RE60 is slated for launch in 4QFY15 in the domestic market (followed by launch in the export markets).

■ Exports: The company is witnessing strong growth across most of the export geographies. Whilst big existing geographies are clocking in healthy volume (exports to Nigeria increased by 30% YoY in 1HFY15), volume growth in newer geographies such as Mexico has also been strong. The export volumes in 1HFY15 contained an order of 40k units of Discover from Sri Lanka which has been completed. Overall, the company expects export volumes to grow around 20% YoY for FY15. Over the next 4-5 years, export volumes are likely to witness a CAGR of 15%.

■ Realisation: The strong improvement in average realisation (6% QoQ and 5% YoY) was on account of: (a) higher share of 3Ws and better mix within motorcycle and (b) INR depreciation; average export currency realisation was Rs61.5/USD in 2QFY15 vs Rs59.9/USD in 1QFY15. Going forward, the management expects export currency realisation to improve further to Rs61.9/USD in 3QFY15 and Rs62.5/USD in 4QFY15.

■ Margin: The company’s raw material costs as a percentage of sales declined from 69.5% in 1QFY15 to 68.6% in 2QFY15. Whilst commodity prices are likely to remain stable, conversion costs (such as labour) may increase at the vendor level. As a result, material costs may inch up marginally in 2HFY15. The increase in ‘other expenses’ (15% YoY) after adjusting the MTM loss and contribution towards Corporate Social Responsibility (CSR) was due to: (a) increase in packing, forwarding and freight expenses (by Rs370mn) due to higher export volumes; and (b) higher advertisement spends during the quarter (Rs220mn) attributable to the launch of Discover 150. Going forward, the management expects advertising and marketing spends to continue given the launch of new variants of Platina and Pulsar by 4QFY15.

■ Where do we go from here?
We retain our positive view on Bajaj Auto on the back of its: (a) strong and growing export franchise (45% of 2QFY15 revenues); (b) opportunity to regain market share in domestic motorcycles (already the company has witnessed an uptick in market share to 18.8% in September vs 16.6% in April-August 2014); and (c) its diversified product portfolio.

In view of a much better-than-expected realisation in 2QFY15, we revise upwards our average realisation estimates for FY15 (by 1%) and FY16 (by 2%). This also results in a 30bps upgrade to our EBITDA margin estimates for FY15 and FY16. Our absolute EBITDA estimates are upgraded by 3% each for FY15 and FY16. Overall, we upgrade our net earnings estimates for FY15 and FY16 by 3% and 2%, respectively.