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You are here : IndiaNotes >> Research & Analysis >> Companies >> Bajaj Auto Ltd. >> Research

Bajaj Auto: Buy for a target implying an upside of 21% over 12-18 months

Way2wealth | 27 Nov, 2017  | Follow Author | Add to my Favourites 
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Company Overview:

- Bajaj Auto Ltd. (BAL) is the world’s third largest manufacturer of motorcycles and the largest three-wheeler manufacturer. It was established on November 29, 1945 as Bachraj Trading Corporation Pvt. Ltd., initially an importer of two-wheeler and three-wheeler until it obtained license from the Govt. of India to manufacture two and three wheelers in 1959.

-  BAL’s market share in the domestic motorcycles segment remained flat at 18% in FY17 compared to FY16. However, BAL lost market share in the exports motorcycles segment, from 66% in FY16 to 60% in FY17, owing to economic and political uncertainties in Africa where BAL is a  major exporter.

-  BAL is the world’s largest three wheeler manufacturer. Its market share in FY17 improved to 64.2% in FY17 as compared to 63.3% in the passenger three wheeler segment primarily due to market share gains in the domestic market. Its overall market share (domestic as well as exports) in the goods carrier segment was 12% in FY17, having entered the segment only in FY16.

Valuation & Recommendation:

BUY with Target Price of Rs3,969 (upside potential of 21%  over 12-18 months).

- We expect BAL Sales and Profit to grow at a CAGR of 15% and 16% over FY17-19E on the back of high exports demand (2W and 3W) led by recovery in African markets and on account of entering new markets. Further, release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore augurs well for BAL being the largest player in the 3W industry.

- We believe BAL will clock 9% CAGR over FY17-20E in the domestic motorcycles segment driven by new launches (CT 100 ES, Platina ES, Pulsar 160 NS, modified V and Avenger upgrade positioned with the V-family in Q4FY18), coupled with improved performance of KTM and Dominar in the next 2-3 years.

- Other growth drivers such as partnership between BAL and Triumph Motorcycles UK, electric 3W launch and approval of Qute in the domestic market by the regulatory authorities would be icing on the cake. These have not been considered in our earnings estimates.

- At CMP of Rs3,293, BAL is currently trading at a PE of 20.0x and 17.0 its FY18E and FY19E consolidated EPS. We value BAL at Rs3,969 per share by applying  21xP/E its consolidated FY19E EPS of Rs189 (including Rs297/share for KTM stake and Rs150 cash/share). We expect BAL to generate free cash flow greater than Rs50bn/annum in the next 2-3 years. With no major capex around, there is considerable scope for increasing payouts. We initiate coverage on BAL with a BUY rating for a target price of  Rs3,969 (upside potential of 21% over  the next 12-18 months).

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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