Macquarie Sec reiterates `Underperform` on Bajaj Auto
Macquarie Securities has reiterated `Underperform` on Bajaj Auto with
a price target of 1,430 as against the current market price (CMP) of
1,732.05 in its report dated Apr. 20, 2012.
The broking house gave the following rationale:
We have revised downward our volume growth assumption for Bajaj`s
domestic as well as export business. We believe the company faces a
serious growth challenge in the domestic motorcycle industry, given
rising competitive intensity and a demand slowdown. Headwinds for
exports to Sri Lanka (35% of 3W and 10% of 2W exports) in the form of
a sharp increase in import duty, and rising competition in Africa, are
also likely to weigh on Bajaj`s export growth. We reiterate our
contrarian Underperform.
Impact:
Sharp deceleration in domestic motorcycle volumes. We expect Bajaj`s
domestic 2W volumes to grow 1% in FY13E compared to industry growth of
6.5%. This slowdown would be due to a likely decline in volume sales
of the Discover after HMSI`s entry into the executive segment (Dream
Yuga), as we believe Discover is a weaker brand than HMCL`s Splendor
or Passion. Further, we think the weak demand outlook of the premium
segment, in which Bajaj has a strong brand in Pulsar, would also weigh
on growth.
Performance of new launches holds the key. Bajaj has recently launched
a new premium segment bike, Duke 200 (from KTM). It also plans to
launch the new Pulsar 200 (based on a KTM engine) and upgrade the
Discover, to stem volume declines in its two biggest brands. We think
performance of new models is the key for Bajaj, as the Discover which
accounts for 50% of Bajaj`s domestic unit sales faces a decline.
Export growth likely to moderate sharply. We believe the large
increase in import duty on 2Ws and 3Ws in Sri Lanka and rising
competition from Honda in Nigeria will moderate export growth in
FY13E. Bajaj`s 2W and 3W export sales grew 2x and 1.7x, respectively,
in two years (FY10-12). We think our 2W and 3W export growth
assumption of 14% and 12% for FY213E have downside risk, given the
headwinds in Bajaj’s key export markets.
Guidance of 20% EBITDA margin is too optimistic. We believe Bajaj is
struggling to reverse volume decline in its high-margin premium bike
Pulsar, due to weak demand in the premium segment. Higher growth of
the Platina compared to Pulsar and Discover, along with slowdown in 3W
exports to SriLanka, will also likely impact margins. Higher
advertising and promotion spends due to a weak demand environment
would also impact margins. We expect Bajaj`s EBITDA margin to come
down by 60bp to 19.5% in FY13E with more downside risks than upside.
Valuation:
Underperform maintained: BJAUT is trading at FY13E PER of 15.7x, which
is a 22% premium to its historical valuation. With downside risk to
volume amidst rising competition, we expect valuations to revert
towards the mean.
Click here to view full report
http://breport.myiris.com/MACQUARIE/BAJAUT1_20120420.pdf
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