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.
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http://breport.myiris.com/MACQUARIE/BAJAUT1_20120420.pdf
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