Bajaj Auto stock price target raised by 10%
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,
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