Hidden between the lines of the obvious weakness in domestic demand for two wheelers evident in December sales figures were resilient export volumes for Bajaj Auto. With almost a third of its volumes derived from exports, this segment is expected to cushion the volume impact for the company.
As the rupee weakness will also factor into margins, exports also provide the necessary diversification for Bajaj Auto to tide over the slowdown in domestic growth. There is no disputing the long term potential for the sector at large and with its strong product line-up and performance over the last year, Bajaj Auto is a key pick across brokerages.
At Rs 1,422, the stock trades at about 12 times consensus one year forward EPS estimates.
Domestic impact
Slowing two wheeler sales in December 2011 reflected the rising weakness in consumer sentiment.
This was probably earlier and sharper than what the market expected which pulled the frontline stocks, Bajaj Auto and Hero MotoCorp down by over 9% in the last week against a 2% rise in the broader BSE Sensex. While two wheelers manufacturers also attributed it to a high base from the previous month, Bajaj Auto lowered its volume guidance for FY12 from 4.5 million vehicles to 4.4 million which was a key disappointment.
Analysts, however, suggested that this was a delayed correction for Bajaj Auto as the stock was overbought based on its steady volume growth and industry leading margins this year so far even against recent management commentary cautioning slower December sales.
The company also attributed the volume dip to a weak performance of the newly launched Boxer 150 cc targeted at the rural market with dealers citing limited marketing push according to Sachin Gupta, auto analyst, Edelweiss Research.
The company has indicated that it will increase advertising spend for the product and this along with the new Pulsar launch is what the market will be closely watching. Its recent four wheeler launch hasn’t created any buzz especially given the weak near- to medium-term outlook for the auto segment at large. Amit Kasat of Standard Chartered Research expects domestic growth to range between 7-8% for the next fiscal year.
Gupta expects the industry to grow at just 5% and cautions that Bajaj Auto could see even slower growth because of its exposure to segments tending to get impacted more in a down cycle.
Talking exports
Exports were expected to come under pressure post the rollback in the DEPB (Duty Entitlement Pass Book) scheme benefits effective September 2011. However, it is significant that exports stayed steady despite a pass through of the reduction in DEPB benefits as price hikes. Analysts are expecting exports to post a strong growth given that a large part of it is to developing markets in Africa, Asia and Latin America, which continue to grow at a healthy pace.
A report by Standard Chartered Research estimates Bajaj Auto’s exports to grow at 20% in FY13 propping total volume growth to 15%.
Meanwhile, the company is also expected to post strong results for December 2011 and March 2012 quarters, as the 3.5% price hikes taken in its export segment (to factor in the lower DEPB benefits) flow through to realisations buffering topline and margins.
This is higher than the net impact of changed DEPB benefits. The reduction in benefits has been negated by a higher incentive for FY12 through the focused markets scheme for Africa and Latin America and an additional one% export benefit.
The impact of the weaker rupee, which is not yet factored in, will only add to the company’s margins boosting earnings further. Kasat sees Ebitda margins for the second half of FY12 at 22% compared to 20.2% in the first half boosted also by reversal of currency losses booked earlier.
With a dividend yield of nearly 3.3%, the stock trades at about 12 times consensus one year forward EPS estimates, marginally lower than peer Hero MotoCorp which trades at about 12.7 times FY13 EPS estimates (dividend yield of 6%). The strong visibility for volume growth and profitability makes Bajaj Auto a preferred pick with key risks arising mainly from slowing export volumes and sharper than expected dip in domestic sales. A strong quarterly result should act as a trigger for the stock.
