ICICI Direct reports weakening of Bajaj Auto owing to serious threats in domestic & export market

ICICIdirect has maintained `Hold` on Bajaj Auto (BAL) with a price
target of Rs 1,460 as against the current market price (CMP) of Rs
1,561 in its report dated Jan. 23, 2012. The broking house gave the
following rationale:
Not thrilled! Core growth remains fragile:

Bajaj Auto (BAL) reported its Q3FY12 numbers with sales coming in
above our estimate at Rs 50.63 billion (I-direct estimate: Rs 48.68
billion) a 21.2% YoY jump. It was driven by a mix of volume growth (up
13.6% YoY) at 1.07 million units and higher realization/ unit (up 5.0%
YoY) to Rs 47,276. BAL had hiked prices 3.5% to offset the DEPB impact
coupled with benefits arising from a depreciating rupee as average USD
rate for the quarter was higher 3.3% QoQ at Rs 49.4. RM cost as
proportion to sales declined 103 bps QoQ as EBITDA margins got
enhanced to 21.0% (up 90 bps QoQ). Reported PAT was ahead of our
estimates at Rs 7.95 billion (I-direct estimate: Rs7.88 billion), a
jump of 19.2% YoY. However, we will analyze beyond these numbers
further in the report.

Highlights of the quarter:

Bajaj Auto`s overall volume growth of 13.6% YoY was led by three
wheeler growth of 18.8% YoY and motorcycle volume growth of 12.9% YoY.
Although the export volume growth is robust at 28.4% YoY, we remain
cautious on the domestic growth front as early signs of an industry
wide slowdown have started creeping in. The weak domestic market
performance is reflected in a QoQ dip of 7.6% with overall domestic
sales in December sliding below the 2 lakh unit mark for the first
time in FY12. Bajaj Auto (Q,N,C,F)* had previously undertaken a price
hike across its export segment to cover the impact of DEPB. The
recently launched Boxer-150 cc has not met expectations with BAL
looking at repositioning the same. The management expects Q4FY12
industry growth to slide down to 5-6% and does not expect a ``V-
shaped` rebound for the same in FY13 in line with our bearish stance
for the segment.

Valuation:

We believe BAL`s domestic volume growth is under serious threat as
witnessed in the last couple of months and exports have been the only
shining light. On exports also, we believe competition from Honda and
Hero MotoCorp would be stiff. Any appreciation of the rupee could
impact our estimates negatively. At the CMP of Rs 1,561, the stock is
trading at 13.7x FY13E EPS. We have valued the stock at 13.9x FY13E
EPS to arrive at a target price Rs 1,460. We maintain our HOLD rating
on BAL.