1. 1QFY2011 Result Update | Automobile
July 23, 2010
Bajaj Auto ACCUMULATE
CMP Rs2,469
Performance Highlights Target Price Rs2,762
Y/E March (Rs cr) 1QFY11 1QFY10 % chg (yoy) Angel est. % Diff Investment Period 12 Months
Net sales 3,890 2,338 66.4 3,870 0.5
Operating profit 777 455 70.6 780 (0.4) Stock Info
EBITDA (%) 20 19 50bp 20 (18)bp Sector Automobile
Reported PAT 590 294 101.1 527 12.0 Market Cap (Rs cr) 35,723
Source: Company, Angel Research Beta 0.7
52 Week High / Low 2,525/1,045
Bajaj Auto (BAL) posted strong set of numbers for 1QFY2011. The company’s top
line was in line with our expectations, while bottom line was above our estimates Avg. Daily Volume 48,926
because of higher other income. High growth was also aided by higher operating Face Value (Rs) 10
leverage and robust volume growth in the domestic as well as export markets.
BSE Sensex 18,131
Capacity constraints, however, restricted volume growth to a certain extent. We
maintain our positive stance on BAL. We revise our estimates upward to account Nifty 5,449
1) higher other operating income (higher export incentives) 2) higher operating Reuters Code BAJA.BO
margin and 3) higher other income on increased liquid investments. Bloomberg Code BJAUT@IN
Performance above estimates: For 1QFY2011, BAL registered 66% yoy growth in
net sales to Rs3,890cr (Rs2,338cr), marginally above our expectations. The uptick
Shareholding Pattern (%)
in volumes was aided by new offerings on the Discover and Pulsar platforms.
BAL’s two-wheeler segment grew by robust 71% yoy, while the three-wheeler Promoters 49.7
segment grew by 58%. EBITDA margins were also in line with our expectations at MF / Banks / Indian Fls 14.7
20%, up 20bp yoy. Net profit spiked to Rs590cr, up 101% yoy and above our FII / NRIs / OCBs 19.0
expectations. Higher other income, improved operating leverage and a dip in
exceptional items (VRS expenditure), on a yoy basis, aided bottom-line growth. Indian Public / Others 16.6
Outlook and Valuation: At the CMP of Rs2,469, the stock is trading at 14.3x
FY2012E earnings, in line with industry leader Hero Honda. We continue to prefer Abs. (%) 3m 1yr 3yr
BAL over Hero Honda in the two-wheeler segment. Hero Honda’s domestic
Sensex 2.5 19.0 15.2
market share in the motorcycles segment has dropped to 54% in June 2010 from
62% in June 2009. With new launches from HMSI, TVS and Yamaha available for Bajaj Auto 17.2 110.5 NA*
sale, Hero Honda’s market share could decline further. Until this happens, we see Note: * Listed on May 26, 2008
Bajaj outperforming Hero Honda on the volume and profit fronts in FY2011. We
recommend Accumulate on BAL with a Target Price of Rs2,762.
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 8,810 11,921 15,926 17,859
% chg (2.3) 35.3 33.6 12.1
Adj. net profit 769 1,784 2,251 2,497
% chg (4.9) 132.0 26.1 11.0
OPM (%) 11.1 20.2 19.5 19.0
Adj. EPS (Rs) 53.2 117.7 155.6 172.6
P/E (x) 46.4 21.0 15.9 14.3
Vaishali Jajoo
P/BV (x) 19.1 12.2 8.1 5.9 022-4040 3800 Ext: 344
RoE (%) 44.5 74.4 61.3 47.9 vaishali.jajoo@angeltrade.com
RoCE (%) 26.7 58.8 59.1 49.4
EV/Sales (x) 3.9 2.7 1.9 1.6 Yaresh Kothari
022-4040 3800 Ext: 313
EV/EBITDA (x) 36.0 13.7 10.2 8.8
yareshb.kothari@angeltrade.com
Source: Company, Angel Research; Note: The numbers are not adjusted for bonus
Please refer to important disclosures at the end of this report 1
3. Bajaj Auto | 1QFY2011 Result Update
Top line marginally above expectations, volumes up by 70%: BAL reported 66.4%
yoy jump in top line to Rs3,890cr (Rs2,338cr), mainly driven by the substantial
70% yoy increase in total volumes. Discover 100 and Pulsar have been the primary
game-changer brands for BAL. Average realisation recorded a decline of about
2.4% yoy during the quarter, primarily due to higher contribution of low-end bikes
(Discover) in the sales mix.
The company’s domestic motorcycle sales grew 71% (as against the industry
growth of 24%) in 1QFY2011. Higher sales in the three-wheeler segment at
99,918 units (63,242) also supported healthy revenue growth. BAL exported
323,899 (178,295) vehicles, an increase of 81.7% yoy in 1QFY2011. During the
quarter, production constraints limited sales to a certain extent. The company
expects motorcycle capacity of 300,000units/month to go on stream from
2QFY2011.
In terms of volume market share, the company improved its position in the two-
wheeler category by 524bp yoy to 20.8% (15.5%) in 1QFY2011, largely owing to
a 745bp yoy increase in the motorcycle segment’s market share to 27% (19.5%).
However, the three-wheeler segment’s market share declined to 36.4% (41.2%) in
1QFY2011.
Exhibit 3: Volume-driven sales growth Exhibit 4: Market share across categories
(Rs cr) (%) (%)
5,000 100 60
90.2
4,000
75 41.2 40.6 40.9
45 37.5
66.4 36.4
64.4
3,000
50 26.8 27.5 27.0
30 22.6
2,000 19.5
25 15 21.1 21.2 20.8
1,000 17.8 17.7
5.1 15.5
0 0
0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Net Sales (LHS) Net Sales Growth (RHS) Three-wheelers Motorcycles Total Two-wheelers
Source: Company, Angel Research Source: Company, SIAM, Angel Research
EBITDA expands marginally by 50bp: During 1QFY2011, BAL’s operating margin
expanded marginally by 50bp yoy to 20%, largely in line with our estimates.
However, the company reported a 289bp qoq decline in EBITDA margin, largely
on account of the 275bp qoq increase in raw-material costs, which accounted for
67.9% of net sales.
The increase in margin on a yoy basis was on account of a decline in other
expenditure and staff costs by 158bp and 392bp, respectively, during the quarter.
Higher volumes of sportier motorcycles, effective cost management and focused
sales promotional activities helped the company to perform better than the industry
at the operating front. Thus, overall, the operating profit for the quarter increased
by 70.6% yoy to Rs777cr (Rs455cr), which largely came in line with our estimates.
July 23, 2010 3
4. Bajaj Auto | 1QFY2011 Result Update
Exhibit 5: 20% EBITDA margin guidance achieved Exhibit 6: Net profit up 101%, beats estimates
(%) (Rs cr) (%)
80 800 20
68.0 70.7
64.8 67.7
64.7 15.6 15.2
14.0 14.4
60 600 12.6 15
40 400 10
22.0 22.0 22.9 20.0
19.5
20 200 5
0
0 0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
EBITDA Margin Raw Material Cost/Sales Net Profit (LHS) Net Profit Margin (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Bottom line at Rs590cr, beats estimates: BAL recorded net profit growth of 101%
yoy to Rs590cr (Rs294cr), which was higher than our expectation by 12%, primarily
owing to higher other income of Rs81.7cr (Rs23.1cr). Other income comprised
treasury income earned on liquid assets of ~Rs3,700cr. Further, improved
operating leverage, lower depreciation, reduced tax rate and a dip in exceptional
items (VRS expenditure), on a yoy basis, aided bottom-line growth.
Conference call: Key highlights
Scenario: The two-wheeler industry continues to perform exceedingly well.
Demand is expected to increase further with the festival season approaching.
However, the industry is facing constraints on the supply front from ancillary
manufacturers and original equipment manufacturers (such as manufacturers
of bearings and tyre tubes). Capacity constraints are limiting two-wheeler
production to a certain extent. Further, meeting demand is a concern with
current inventory at lower levels. However, post the festival season, demand is
expected to come down to normal levels.
Production: The company expects to sell four million units during FY2011E in
the two-wheeler and three-wheeler categories. The additional two-wheeler
capacity by 100,000 units/month from the Pantnagar plant is expected to go
on full stream from 3QFY2011E. During 1QFY2011, the company produced
~73,000 units/month and expects to ramp it up to ~85,000 units/month by
2QFY2011E. Of the additional capacity that has gone on stream, ~30%
would be utilised towards production of Platina and the remaining for Discover
and Pulsar. The company sees a potential of ~200,000 units/month for
Discover and Pulsar and ~35,000 units/month for Platina. Currently, BAL is
running out of stock for Discover 100, Discover 150 and Pulsar 150.
On the three-wheeler front, the company is seeing additional demand
30,000–35,000 units from Tamil Nadu as the permit system in the state has
been abolished. Even on the exports front, demand remains robust. However,
the company intends to meet the domestic demand with priority and maintain
a balance between exports and domestic sales. With TVS Motor entering the
three-wheeler space, the market has become competitive and BAL continues to
lose market share; however, overall sales volumes for the company continue
to increase.
July 23, 2010 4
5. Bajaj Auto | 1QFY2011 Result Update
Price increases: In April and June 2010, BAL increased prices across its two-
wheeler brands (Platina, Discover and Pulsar) by Rs500–1,500. In the three-
wheeler segment, prices were increased by Rs2,000 in April 2010. The
company has also increased prices in the export market. Going forward, BAL
seems comfortable and does not feel any need to take action on the pricing
front.
Raw-material cost: BAL expects raw-material costs to decline marginally in
2QFY2011E qoq. However, the raw-material cost pressure is expected to be
higher on a yoy basis. The company has re-negotiated raw-material contracts
(steel and aluminium) at reduced price levels compared to 1QFY2011.
EBITDA margins: As per the management, EBITDA margins of ~20% look
extremely comfortable. EBITDA margins, which came in at 20% for
1QFY2011, were impacted by higher raw-material costs and increased labour
cost due to average yearly wage hike of ~12%. Going ahead, the company is
optimistic about maintaining margins at current levels, as raw-material prices
have cooled down in 1QFY2011 and the impact of labour cost is not expected
to recur. However, EBITDA margins can show a marginal contraction for the
full year because of administration cost and advertising spend, which were
not accounted for in 1QFY2011.
Exports: On the exports front, BAL seems to be extremely bullish and is
targeting one million units for FY2011E. However, looking at the exports
performance for 1QFY2011 (323,899 units, up ~82% yoy), the company may
easily surpass its guidance by ~200,000 units. The company is seeing robust
demand from the Sri Lankan, Egyptian, Colombian, Bangladeshi and African
markets. Within Africa, BAL is witnessing major demand from Nigeria. The
company expects Africa to be the major growth driver for exports and sees
demand growing by 20–25% for FY2011E, while demand from other countries
could be up by 10–15%. BAL enjoys higher margins (~3–4%) from exports
compared to domestic sales. The company has also taken a price increase in
the exports market post July 2010, which would also fetch higher realisations
in the remaining quarters of the current fiscal.
Capital expenditure: BAL expects overall capital investment in the range of
Rs225cr–250cr during FY2011E. The investment would be towards capacity
expansion, research and development and development of new platform for
the four-wheeler project with Renault and Nissan. The overall capacity
available for production by the end of FY11E is expected to be five million
units. It also intends to develop a multi functional platform through which it
can manufacture commercial vehicles (substitute for three-wheeler cargo) and
passenger cars. The development of the new platform will entail an investment
of Rs500cr in a phased manner.
July 23, 2010 5
6. Bajaj Auto | 1QFY2011 Result Update
Subsidiary update: The Indonesian subsidiary, which suffered an overall loss
of Rs38cr (adj. for extraordinary gains) in FY2010, suffered a loss of Rs6cr
during 1QFY2011. The company expects the Indonesian subsidiary to
break-even by FY2012E. It is targeting sales units of 25,000 during FY2011E.
The company has recently launched Pulsar 150 in Indonesia and it has been
received well in the Indonesian market.
Bajaj Auto is also working with KTM (35.2% stake in KTM) to jointly develop
engines and platforms for production. For the nine months ending May’10,
KTM recorded net profits of Euro 3mn. On the consolidated basis
management has indicated that the net profit for the company for FY12E
would be similar to the profits of the standalone entity.
Exhibit 7: Motorcycles – Volume and market share Exhibit 8: Three-wheelers – Volume and market share
(Units) (%) (Units) (%)
110,000 75
900,000 80
700,000 85,000 50
50
500,000 60,000 25
20
300,000 (10) 35,000 0
100,000 (40) 10,000 (25)
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
Market Share (RHS) McycleVolume (LHS) % yoy growth(RHS) Market Share (RHS) 3-wheelers Volume (LHS) % yoy growth (RHS)
Source: Company, SIAM, Angel Research Source: Company, SIAM, Angel Research
Investment Arguments
Focus on Discover and Pulsar to improve market share: BAL continues to
witness strong demand in the two-wheeler segment from its strong dual
offering of Discover and Pulsar. The successful launch of
Discover 100cc bike in the executive value segment has improved the
company’s market share to 26.7% (about 15% in June 2009) in June 2010.
BAL is positioning itself in line with its strategy of 'value and price products',
wherein it proposes to tap higher-value bike segments, which have a high
growth potential and fetch better realisations. BAL has also launched new
products in the high-margin 125cc+ segment.
Three-wheeler registering healthy growth: BAL has a strong presence in the
three-wheeler market, with an overall market share (including exports) of
around 57%. BAL still tops the passenger auto-rickshaw segment, which
accounts for around 88% of the three-wheeler market. The three-wheeler
segment fetches higher margins than the company’s two-wheeler business.
BAL has lost some market share in the three-wheeler domestic market, but
improving export volumes have more than compensated to post higher
volume growth. We expect the company’s three-wheeler volumes to grow by
11–12% over FY2010–12E.
July 23, 2010 6
7. Bajaj Auto | 1QFY2011 Result Update
High growth potential in export volumes: BAL registered strong exports CAGR
of 37% during FY2005–10, aided by a 43% CAGR in two-wheeler exports and
a 22% CAGR in three-wheeler exports. Going ahead, with strong traction in
the recent months, we estimate BAL to register a 21% CAGR over
FY2010–12E, driven by higher penetration in the African market. Bajaj has
also hedged around 75% of its FY2011 exports at a USD–INR rate of Rs47.
Hence, any sharp appreciation of the rupee in FY2011 will not have a
significant impact on the company’s margins.
Outlook and Valuation
We maintain our positive stance on BAL. We revise our estimates upward to
account 1) higher other operating income (higher export incentives) 2) higher
operating margin and 3) higher other income on increased liquid investments.
Exhibit 9: Change in estimates
Y/E March (Rs cr) Earlier estimates Revised estimates % chg
FY11E FY12E FY11E FY12E FY11E FY12E
Net sales 14,866 16,836 15,926 17,859 7.1 6.1
OPM (%) 19.4 18.8 19.5 19.0 14 19
EPS (Rs) 142.2 157.1 155.6 172.6 9.4 9.9
Source: Angel Research
At the CMP of Rs2,469, the stock is trading at 14.3x FY2012E earnings, in line with
industry leader Hero Honda. We continue to prefer BAL over
Hero Honda in the two-wheeler segment. Hero Honda’s domestic market share in
the motorcycles segment has dropped to 54% in June 2010 from 62% in June
2009. With new launches from HMSI, TVS and Yamaha available for sale, Hero
Honda’s market share could decline further. Until this happens, we see Bajaj
outperforming Hero Honda on the volume and profit fronts in FY2011. We
recommend Accumulate on BAL with a Target Price of Rs2,762.
July 23, 2010 7
14. Bajaj Auto | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Bajaj Auto
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 23, 2010 14
