Rising sales to emerging countries to buffer slow domestic demand and boost overall performance.
Hidden between the weak December sales figures for Bajaj Auto, reflecting domestic demand for two wheelers, were contrastingly resilient export volumes. With almost a third of volumes derived from exports, this segment is expected to cushion the volume impact. As the rupee weakness factors into margins, exports provide necessary diversification for Bajaj to tide over the slowing in domestic growth. There is no disputing the sector’s long-term potential, and with a strong product line and performance over the past year, Bajaj is a key pick across brokerages. At Rs 1,424.75, the stock trades at about 12 times consensus one-year forward estimates for earnings per share.
Domestic impact
Slowing two-wheeler sales in December reflected the rising weakness in consumer sentiment. This was probably earlier and sharper than what the market expected and it pulled the frontline stocks, Bajaj Auto and Hero MotoCorp, down by a little over nine per cent in the past week against a two per cent rise in the broader BSE Sensex.
While two-wheeler manufacturers also attributed it to a high base from the previous month, Bajaj Auto lowered its volume guidance for 2011-12 from 4.5 million vehicles to 4.4 million. Analysts suggested this was a delayed correction, as the stock was over-bought, based for its steady volume growth and industry-leading margins this year so far, after recent the management cautioning on slower December sales.
The company also attributed the volume dip to weak performance of the new Boxer 150cc, targeted at the rural market, with dealers citing limited marketing push, according to Sachin Gupta, auto analyst, Edelweiss Research.
The company says it will increase advertising spending for the product and this, 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-term to medium-term outlook for the auto segment at large.
Amit Kasat of Standard Chartered Research expects domestic growth to range at seven to eight per cent for the next financial year. Gupta expects the industry to grow at just five per cent and says Bajaj could see even slower growth because of exposure to segments tending to get impacted more in a down cycle.
Exports
Exports were expected to come under pressure post the rollback in the DEPB (Duty Entitlement Pass Book) scheme benefits effective October 2011 from 9 per cent to 5.5 per cent. However, it is significant that exports stayed steady, despite a passthrough of the reduction in DEPB benefits as price increases. Analysts are expecting exports to show strong growth, given that a large part is to developing markets in Africa, Asia and Latin America, which continue to grow healthily. A report by StanChart Research estimates Bajaj Auto’s exports to grow at 20 per cent in 2012-13, propping total volume growth to 15 per cent.
| EXPORTS MASKING DOMESTIC HICCUPS | |||||
| In units | Dec-11 (monthly) |
% change | |||
y-o-y
| STEADY MARGINS | |||||
| Q3' FY12E | Change (%) | FY12E | Chg (%) y-o-y | ||
| q-o-q | y-o-y | ||||
| Volumes ('000) | 1,119 | -3.9 | 18.2 | 4,536 | 18.6 |
| Realisation (Rs) | 45,951 | 1.6 | 4.2 | 45,142 | 3.9 |
| Net sales (Rs crore) | 5,141 | -2.4 | 23.1 | 20,475 | 23.3 |
| RM/sales (%) | 71 | -40* | -70* | 71.3 | 30* |
| Ebitda (Rs crore) | 1,058 | 0.0 | 24.5 | 4,162 | 23.0 |
| Ebitda margins (%) | 20.6 | 50* | 90* | 20.3 | -10* |
| Adj. PAT (Rs crore) | 839 | 6.3 | 25.8 | 3,174 | 21.3 |
| E: Estimates * bps Source : Motilal Oswal research estimates | |||||
Meanwhile, the company is also expected to post strong results for December 2011 and March 2012 quarters, as the 3.5 per cent 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 per cent export benefit. The impact of the weaker rupee will also add to the company’s margins boosting earnings further. Kasat sees Ebitda margins for the second half of FY12 at 22 per cent compared to 20.2 per cent in the first half boosted also by reversal of currency losses booked earlier.
With a dividend yield of nearly 3.3 per cent, the stock trades at about 12 times consensus one-year forward EPS estimates, as noted earlier. This is marginally lower than peer Hero MotoCorp, which trades at 12.7 times 2012-13 EPS estimates (dividend yield of six per cent).
The strong visibility for volume growth and profitability makes Bajaj Auto a preferred pic. The key risks arise mainly from slowing export volumes and a sharper than expected dip in domestic sales. A strong quarterly result should act as a trigger for the stock.
