Lines up six variants of Discover to garner market share
Bajaj Autos Q4FY13 profit after tax of R7.7 bn (up 1.9% year-on-year) surpassed our estimate on higher other income, but Ebitda margin at 17.6% disappointed on higher expenses. While the managements outlook for the domestic motorcycle business is muted, it is planning six Discover variants with an eye on market share. We expect margin to improve due to favourable currency hedges and lower commodity costs. We maintain our earnings estimates, but revise up our target price to R2,103 (R1,660) as we roll forward our valuation to FY15e (estimates) and increase P/E (price-to-earnings) multiple from 12x (times) to 14x driven by possible upsides from the RE60 project and also from stronger motorcycle sales in an election year. Upgrade to Buy Bajaj Auto Ebitda (earnings before interest, taxes, depreciation and amortisation) margin disappointed at 17.6% (19.8% in Q4FY12, 18.7% in Q3FY13). Improvement in gross margin was more than offset by higher staff costs and other expenses. However, PAT at R7.7 billion (up 1.9% y-o-y, down 6.5% q-o-q) was above ours and streets estimates, driven by higher other income (by R506m than our estimate) and lower tax rate (25.9% vs our estimate of 30%).
Though the managements FY14 domestic market outlook is weak, it has lined up six variants of Discover (two in premium segment, others in R40k-50k price range) with an aim to garner market share. Additionally, it is refreshing its entire three-wheeler offering, which is expected to hasten the replacement cycle. Bajaj Auto is targeting 10-12% volume growth in exports in FY14 along with higher margins due to favourable currency hedges ($ at R54 vs R49.5 in FY13).
Valuations: We expect Bajaj Autos domestic motorcycles sales to grow 4.5%/7.5% in FY14e/FY15e, respectively, and exports to surge 12-15%. We maintain our earnings estimates
for FY14/FY15, but revise up our SOTP (sum-of-the-parts)-based target price to R2,103. Upgrade to Buy/Sector Outperformer from Reduce/Sector Underperformer.
Volume outlook: The company didnt give any growth guidance for domestic sales due to high uncertainty. However, it guided for 10-12% volume growth in exports from existing markets in FY14. Sri Lankan market is likely to be stable and Latin America and Africa markets should see growth. It also has an order backlog of over 10k units from Egypt due to no fresh LC (letter of credit) issuance because of the economic unrest there. Shipping of bikes to Indonesia is expected from July under the JV with Kawasaki.
Margin outlook: The company has guided margins to be in the range of 19-20% despite favourable hedges and softening commodity prices as the benefit would largely be offset by higher labour, power and fuel, transportation and other costs. Also, increasing contribution of economy bike will also be margin-dilutive. Though favourable hedging will help margin expansion in exports, half of it will likely be spent on new launch and geography expansion related expenses.