Riding on pricing power

Updated: Jul 29 2013, 17:15pm hrs
Strong pricing power to boost earnings: We attended Bajaj Autos concall and were impressed by the managements ability to retain most of the benefit of Rupee depreciation in the export markets despite sluggish volumes. We believe volume growth will remain challenging in two-wheelers in both domestic and export markets but will be partially offset by strong growth in three-wheelers. We retain our Add rating and increase target price to R2,200 (from R2,000 earlier).

Better realisation on export sales to boost margins further: The company indicated that the average R/$ rate for Q1FY14 was 55.6 while they have hedged the rest of FY2014 between 58 and 64. At the current rate, even if the company passes on 50% of the incremental benefit of rupee depreciation to customers, Ebitda (earnings before interest, taxes, depreciation and amortisation) margin could expand by 100 bps from Q1FY14 levels. The company has already taken a price increase of 1% from April 2013 onwards to offset the hike in input cost due to rupee depreciation.

Domestic volumes to remain sluggish in FY14: The company indicated that the industry is likely to see a volume decline of 2% year-on-year in Q2FY14.

We have cut our domestic motorcycle volume growth estimates to 5% y-o-y for FY14 (vs 6.5% y-o-y earlier) and have thus moderated our volume growth assumptions for Bajaj Auto.

The company will launch four new motorcycles under the Discover brand over the next six months to gain market share in the executive segment.

Bajaj Auto ruled out any increase in promotions or discounts, indicating discounts are not an effective way of increasing market share. Inventory levels are around five weeks at the dealer-end and have not come down to comfortable levels.

Export demand impacted by external factors while inherent demand remains strong: Bajaj export volumes were impacted by a ban on two-stroke bikes in Nigeria and the civil unrest in Egypt.

To offset the loss of volumes in Nigeria, the company plans to increase its presence in Kenya, Ivory Coast, Congo, Guinea and other small African markets. The company has gained further market share in Africa (volumes have been flat y-o-y in Q1FY14 while industry declined). Bajaj is confident of achieving 12-15% y-o-y growth in the three-wheeler segment, driven by the new permits in Karnataka and Hyderabad in FY2014.

Kotak Institutional Equities