Bajaj Auto

Result Highlights

•Bajaj Auto (BAL) numbers came above expectations with sales of INR 34 bn, an increase of 80% annually and 3.2% sequentially.

•EBITDA increased 280% on an annual basis to INR 7.3bn with an expansion in EBITDA margin to 21.5% compared to 10.2% in the previous year.

•However raw material costs as a percentage of sales are still rising. The company said that maintaining profit margins at current high levels would be a challenge.

•Net profit quadrupled to INR 5.29 bn for the quarter, compared to INR 1.3 bn on an annual basis. Net margins improved 860 basis points (bps) on an annual basis and 110 bps sequentially.

Outlook

•BAL targets sales of 4 mn vehicles in FY11, including 1 mn exports, a growth of around 40%. •Motorcycle sales are targeted at over 3.6 mn vehicles while three wheelers sales at about 400,000 vehicles. •Anticipating improving demand, BAL will be incurring a capex of INR 2.5-3 bn in the current fiscal to expand its production capacity to 5 mn units a year from 4.2 mn currently. The capital expenditure in FY10 was around INR 1 bn.

Valuation

•The company promises strong growth and has been able to gain market share from the industry leader Hero Honda in FY10.

•However margins may come under pressure not just due to rising raw material prices but also due to competition. BAL has started a price war in the 150CC category by launching the Discover model at INR 46000 (ex-showroom).

•At the current market price of INR 2204, the stock trades at 14x its FY11e EPS. We feel investors can hold the stock with a one year price target of INR 2285.