Bajaj Auto Q1FY13: Signs of recovery
Results a tad below expectations, tax rate moves up as Pantnagar benefits go off
Bajaj Auto’s Q1FY13 numbers came in slightly below their expectations, but in-line with the market expectations. Net sales including other operating income came in at Rs4865 cr, which was a 4.6% up QoQ and 1.9% YoY. Net realizations were up 4% YoY but down 1.6% to Rs43,687 which more than offset the 1.3% YoY decline in volumes to 1.078 mn. Domestic revenue grew 4.1% YoY to Rs32.3bn, driven by 4.5% YoY improvement in gross domestic realization to Rs48,745, which more than offset the 0.3% YoY decline in domestic sales volume to 663,626 units. Exports revenue grew 3% YoY to Rs17.4bn, driven by 5.9% yoy improvement in exports realization to Rs41,815, which more than offset the 2.7% YoY decline in sales volume to 415,645 units.
At the EBITDA levels, RM costs to sales increased to 72.1%, a dip by 45 bps YoY, but an increase of 88 bps sequentially. Employee costs grew by 15% YoY and 34% QoQ, while employee costs to sales grew to 3.4%, v/s 2.6% QoQ on a 12-13% wage hike taken during the quarter. Other expenses jumped by 28% yoy and 5% QoQ as it contained Rs360 mn of forex hedge adjustment. All these expenses collectively dragged down the EBITDA margins to 17.9%, which was a 120 bps decline yoy. Other income grew by 149% YoY and 30.5% QoQ, due to Rs920 mn of treasury income now added to it according to the change in accounting policy done last quarter. Higher than expected tax rate at 29.5% was a 410bps jump sequentially, thus depressing the bottomline, which was a 4.4% dip QoQ and a flattish growth YoY. This was due to Pantnagar tax benefits expiring from FY 13 onwards. EPS for the quarter came in at Rs24.8.
New launches in domestic markets to assist Bajaj Auto to post 7-8% volume growth in FY13
With new launches of the high margin KTM bikes (though a low volume product in India), Pulsar 200NS and Discover 100cc and the recent launch of Discover 125ST, LKP may witness Bajaj Auto weathering the weakness in demand observed off late and get back on a recovery path. However, with the Honda Dream Yuga 110cc, Suzuki’s Hayate 110cc and Hero’s new launches of Ignitor 125 cc and Passion XPro 110cc will provide tough competition to Bajaj in the mass and executive segment, while the premium segment is seeing a sharp demand erosion due to the higher cost of ownership in a scenario where interest rates are high and fuel cost is rising. Management expects that in Q2FY13, the 2W industry will grow at 5% and the second half will see some improvement with the full year reporting 7-8% growth as festive seasons are falling in the second half this year. Management has admitted that achieving a 5mn target for FY13 looks difficult. On 3W front, the management is cautious as there is no clarity on new permits opening while the diesel based 3W is seeing some amount of traction. Domestic 3W grew by 6% in Q1, which was better than their expectations, which would perform well according to us going forward as diesel vehicle demand is moving up. LKP factors in 8% growth for the domestic 2W business and 2% growth in domestic 3W business. Bajaj Auto has made its intentions clear to expand its capacity by 25% to 6.3mn depending on how demand pans out in the second half of the year.
Recovery in Sri Lanka and Egypt is on its way, Africa and Latam to drive export growth
Bajaj Auto has cut the prices of its vehicles significantly in Sri Lanka following the kneejerk fall in volumes post the government there increaseing import duties on 3W and 2Ws. In the month of June the company has witnessed a solid recovery on the retail demand as the dealers sold ~4,000 3W and are expected to liquidate their remaining inventory by August thus selling 8,500 units by then. Bajaj Auto expects to sell close to 10,000 units from the second half of the year getting back to normalcy. Bajaj Auto commands 60% market share in Sri Lanka thus enabling it to get back the lost demand due to a temporary hiccup. With the political environment in Egypt also getting settled post the presidential elections over there, the 3W sales in Egypt are expected to get back to normal figure of 5,000 units of 3W per month with immediate effect. Bajaj Auto is observing strong demand from Africa and Latin America which is expected to offset any fall in other geographies hereon. LKP expects 2W exports to grow at 10% this year, while 3W exports to recover with a fall of 13% post a 41% decline in Q1.
Robust margins assisted by weaker rupee, price hikes and easing RM prices
The reclassification of EBITDA margins due to exclusion of treasury income from other operating income now, Bajaj Auto’s reported EBITDA margins are not comparable with previous quarters or previous years. EBITDA margins reported according to this new adjustment came in at 19.4% which were actually at 17.9%. EBITDA margins were impacted due to lower realizations on account of adverse product mix as the low margin Platina sold high volumes and 3W also faced a sharp decline in this quarter due to issues stated above both in domestic as well as export markets. However, weak rupee did not help Bajaj auto as Bajaj auto had taken export hedges much below the current level of rupee. Bajaj auto has taken a price hike of Rs500-1000/vehicle in May and again in July which may help them to improve margins going forward. Also the new launch of Pulsar200 may help them to improve margins. Improvement in 3W exports will also help them to improve margins. Export hedges as indicated by the management may move up if the rupee does not appreciate significantly. This may again help Bajaj auto to improve margins from the lows observed in Q1. Q2 may see soft margins as aluminium and other alloys prices are on slight upmove. Bajaj Auto have factored in slight growth in margins of 18.7%/19.0% in FY13E/14E respectively.
Outlook and valuation
Given the expectation of revival in demand through new launches in a weak domestic environment and recovery expected in the troubled export markets of Sri Lanka and Egypt performance LKP believes the worst for Bajaj Auto is behind. With second half expected to do better along with pan India launch of Pulsar 200NS and new launch of a motorcycle during Diwali, LKP expect motorcycles to do well. With RE 60 getting launched by December, 3W exports may get a fillip. With price hikes taken, RM prices expect aluminium and some alloys softening a bit and 3W sales in exports improving, LKP see better margins in the ensuing quarters. At CMP of Rs1,545, the stock trades at 12x times FY14E EPS of Rs129. LKP has rolled over their estimates to FY14, due to which LKP is upgrading the stock to a BUY from Neutral with a TP of Rs1,776 (Standalone business valued at Rs1737 @13.5x times FY13E earnings + KTM business value of Rs34 and Indonesia business valued at Rs5).
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