We rate Bajaj Auto a ‘buy’ on strong positioning in premium bikes segment, which should structurally expand over time and early mover advantage in export markets, where the company has potential to increase penetration and market share. We also raise our price objective by 10% to R2,095, driven by upward revision of EPS forecasts by 3-5% over FY14-15e.
We expect sales mix to improve by 100-200 bps (to 25%-28%). We also expect the stock to re-rate to 15x (from 14x earlier) FY14 P/E largely on expectations of accelerated shift in demand to premium models. At our price objective, the stock would trade at 10.4x FY14e EV/ebitda. Bajaj Auto deserves to trade at a premium to historic P/E (12x) and at least at par with dominant competitor Hero (15x), mainly due to superior franchise in premium models, which is less vulnerable to competition and thereby growth more secular.
Bajaj Auto’s growth rates, both on our as well as consensus estimates are stronger than peers, especially Hero. We also believe the company is less vulnerable to competition and therefore margins, again due to premium exposure (25%), and exports (40%), lending credibility to forecasts. Although Bajaj Auto trades at premium to historic average, we believe this is not relevant as the company is different from the past, based on scale of operations, and resilience to earnings, both due to growing contribution from premium products and exposure to external markets. We believe that rising incomes and wider product choices will drive aspiration to own pricier models, thereby accelerating customer shift to premium bikes. As in past, we expect premium segment to sustain above industry growth over the next 5 years (15% vs 10%) and thereby near double proportion of bikes sold in India (from 14% to over 25%).
Bajaj auto derives 25% of sales and estimated ~30% of profit from premium Pulsar brand. We believe KTM partnership will likely enhance capability and expect the company to further leverage franchise, driven by several launches sharing common platform with KTM Duke such as 375cc offering (2013) and possibly 500cc model later. Already, 200cc Pulsar (monthly sale ~9,000 units) illustrates this success. We also expect 150cc/180cc Pulsar variants to incorporate this platform and exploit full potential of brand.