>BAJAJ AUTO (MOTILAL OSWAL)

■ Bajaj Auto 4QFY09 results are above estimates, but for forex loss of Rs218m on hedging instruments. EBITDA margins were at 15.2% and adjusted PAT of Rs1.87b.

■ Volumes declined 20% in 4QFY09 (two-wheeler sales declined 22% YoY where as 3Ws de-grew 7%). However, realizations in 4Q improved by 14% YoY (flat QoQ) due to improvement in product mix.

■ Revenue at Rs18.8b de-grew by 9%, due to 20% decline in volumes. However, improvement in business mix and RM cost savings led to 70bp QoQ (~260bp YoY) improvement in EBITDA margins to 15.2%, translating into EBITDA of Rs2.86b. During the quarter, Bajaj accounted for forex loss of Rs218m on hedging instruments. Adjusted PAT at Rs1.87b was higher by 22% YoY.

■ Higher INR/USD realization in FY10 would drive export realizations and EBITDA: Bajaj would benefit from higher INR/USD for its exports. For FY10, it has entered into collar option for US$535m (70-75% of expected export revenues). The collar option provides bottom side protection at Rs47 and caps upside at Rs55. At floor rate of Rs47, its export realizations would be higher by 14% over FY09 average rate of Rs41.2.

■ Upgrading estimates: We are upgrading our earnings estimates for FY10 by 13.9% to Rs72.4 and FY11 by 15.5% to Rs78, to factor in for a) Higher export realizations and b) RM cost savings of 370bp in FY10 over FY09. The stock trades at 12.9x FY10E EPS and 7.6x FY10E EV/EBITDA. Maintain Buy.

To see full report: BAJAJ AUTO

>KOTAK MAHINDRA BANK LIMITED (KR CHOKSEY)

Steadying ship in turbulent seas

Impressive Outperformance – Kotak Mahindra Bank beat estimates with Net Profits increasing 40.7% q-o-q to Rs 171 crores on back of continued robustness in the core business. Profits growth from banking activity was even more impressive growing ~44% to Rs 102.6 crores in Q4FY09 from Rs 71.1 crore while profits from lending business (Kotak Mahindra Prime) grew 41% to Rs 47 crores. Capital Markets related businesses underperformed in Q4 with advisory business loosing Rs 3.8 crores on account of slowdown in corporate activity. Brokerage net revenues also degrew ~80% y-o-y as stock market volumes declined. The quality of earnings improved in FY09 as the share of profits from volatile capital markets business declined to 18% and the share of profits from banking and financing business grew to 67%. Management’s ability to manage balance sheet continues to be impressive as the bank was a net lender on most days during the liquidity crisis of
October 2008.

Net Interest Margins – The banks NIMs are easily the best in the industry. NIMs grew 40 bps y-o-y to 6% for FY09 from 5.6% in FY08. Wholesale funding was available at ~6% as the rates on the short end of the curve have been driven down by surplus liquidity while retail deposits, which compete with administered rates, were 150 – 175 bps more expensive at 7.5 to 7.75%. Management believed that it was prudent to boost margins by incrementally shifting funding sources to wholesale deposits from retail deposits.

Asset Quality – Management continued to be cautious during the turbulent times changing asset mix and slowing advances growth. Total retail advances were flat in FY09 at ~Rs 19600 crores. The compositions of retail advances shifted to lower risk secured assets, such as housing loans (which increased 300 bps y-o-y) and away from higher risk assets, such as unsecured personal and business loans (which decreased 400 bps y-o-y) and commercial vehicles (which decreased 200 bps). Gross NPA increased from 2.56% in FY08 to 3.64% in FY09 while Net NPA increased to 2.02% in FY09 from 1.65% in FY08. Coverage ratio declined 4% q-o-q on account of higher slippages.

Our View – At current price of Rs 619 the stock is trading at ~2.72 x FY10E P/BV. We maintain a hold on Kotak Mahindra Bank with a target price of Rs 695, giving an upside potential of 12% from the current levels, on account of: 1) balance sheet well positioned to grow advances by 10 – 15% without pressuring RoE or raising additional capital; 2) incremental shift in asset mix in favor of corporate advances will reduce risk; 3) potential multiple expansion of insurance subsidiary on account of policy changes; 4) rationalizing of bank branches will reduce operating expenses. 5) cost control measures (consolidating back office to lower rental premises and moving front office function to BKC) will improve operating efficiencies; 6) capital markets business well positioned fore recovery. Downside risks to out price target include: 1) volatility in the wholesale funding markets driving up funding costs and pressure margins; 2) slower than expected credit growth; 3) prolonged slowdown in capital markets and corporate activity driving down subsidiary profits


To see full report: KOTAK MAHINDRA BANK

>EXIDE INDUSTRIES (BNP PARIBAS)

Thesis reiterated post mgmt call

• Impressive 20%, 17% growth in replacement, industrial volume in 4QFY09; demand remains unscathed by slowdown.

• Company confident of improving margin given lower lead price, smelting capacity expansion and minimal price cuts.

• TP of INR70 (based on 13x FY10E EPS and INR10 for ING Vysya Life stake). Reiterate BUY.

■ Improved confidence in sustainable earnings growth
Our recent call with Exide’s management gave us confidence in our expectation of a greater than 25% EPS growth in FY10, on strong volume growth led by the replacement segment of automotive batteries and margin expansion led by lower lead price. The replacement segment, which accounts for more than half of Exide’s operating profits, rose 18-20% in 4QFY09. The segment will continue to impress in FY10 due to battery replacements driven by a higher vehicle base post the auto boom in FY03-07. The management was also confident about continued growth in the industrial segment, which was up more than 15% in FY09.

■ Pick-up in auto OEM demand a long-term positive
Exide is seeing improvement in demand from auto OEMs, coming out of the trough in the December 2008 quarter. Sales to auto OEMs, being low-margin, may only be marginally beneficial for the bottom-line in the near-term. However, it is a key long-term positive since higher OEM sales will eventually translate to higher replacement sales, due to increase in the vehicle base, and also because customers tend to largely replace worn-out batteries with the same brand which is pre-fitted in the vehicle.

■ Expect strong margin expansion in FY10
We expect a 250bp EBITDA margin expansion in FY10, driven by lower lead price (lead cost accounts for more than 50% of revenue) as well as greater reliance on cheaper recycled lead. FY10 will not be affected by the problem of ‘high-cost inventory in a falling lead price environment’ which affected 2HFY09, since about 55% of Exide’s revenue is governed by pass-through agreements. Since lead prices have stabilized in the USD1,200-1,400 range, the full margin potential should be visible starting 1QFY10.

■ Stock attractively valued
Our TP of INR70 is based on INR60 for the core business based on 13x FY10E EPS and INR10 for Exide’s 50% stake in ING Vysya life insurance. Even if we assign a zero value to the stake in the insurance business, Exide is currently trading at 10.7x FY10 EPS.

To see full report: EXIDE INDUSTRIES

>BHARAT FORGE (PRABHUDAS LILLADHER)

Industry slowdown hurts performance

■ Sharp decline in topline: Bharat Forge (BFL) reported a sharp 49.7% YoY degrowth in topline to Rs2.9bn, on account of a 48.3% YoY decline in the domestic revenues at Rs1.7bn. The company also witnessed a slowdown in their exports; exports declined by a whopping 51.6% YoY at Rs1.2bn. The general economic slowdown across the globe as well as production cuts, especially in the commercial vehicle (CV) segment, led to a severe decline in the revenues on a standalone basis. Operating profits declined by 70% YoY at Rs427m, whereas operating margins declined by 10% YoY to stand at 14.6%. The company reported a forex gain of Rs987m on account of adoption of the revised AS 11 accounting norms. As a result, the decline in PAT was restricted at 26.2% YoY (Rs611m). However, excluding the forex gain, BFL reported a loss of Rs377m.

■ Consolidated performance: On a consolidated basis, BFL reported a decline of 46.8% YoY in net sales at Rs6.1bn, while reported PAT was down 68% at Rs203m. EBITDA for the quarter stood at Rs176m, a decline of 90.5% YoY. 􀂄 Increasing focus on the non–auto business: The facilities at the Baramati plant and the open die forge facility in Pune have commenced operations. These plants have an annual forging capacity of 125,000 tpa and are expected to generate a revenue of Rs10bn-11bn at their full capacity utilization. However, in the medium term, the utilization of the new capacity might be impacted due to a slowdown in the user industries (construction, mining and marine).

■ Outlook & Valuation: With the auto industry in US and India facing tough times, we expect the non–auto business to be the key growth driver for BFL in the long term. However, we believe that the non-auto business will start contributing significantly to the revenues post FY10E. The stock is currently trading at 19.0x and 12.4x our FY10E and FY11E earnings. Given the uncertain economic environment in the US as well as European markets (which account for ~65% of BFL’s consolidated sales) for atleast the next two quarters, we rate the stock as ‘Reduce’.

To see full report: BHARAT FORGE