For Q3FY2009, Bajaj Auto (BAL) clocked net sales of Rs2,103 crore, down 15.9% y-o-y which was ahead of our expectation of Rs1,922 crore.
Total volumes for the quarter declined 30.8% y-o-y while average realizations per vehicle improved substantially by 20.7% primarily due to the change in sales mix and better performance by the 125cc-plus segment.
Growth in the 125cc plus segment was however, offset by poor performance by the 100cc segment. BAL’s Bottom-line for the quarter at Rs164.3 crore also came in better than our estimate. Net Profit fall was restricted by lower depreciation and tax during the quarter.
During Q3FY2009, BAL witnessed a marginal 13bp y-o-y decline in EBITDA margins. However, q-o-q, the company clocked an almost 105bp improvement largely due to the 170bp q-o-q decline in raw material cost, which accounts for almost 75.9% of sales.
Operating Profit fell 16.7% y-o-y to Rs305.8 crore (Rs366.9 crore), which also came in better than our estimate of Rs166.2 crore.
Variance was due to the extremely lean cost structure achieved by BAL as some plants were closed to cut inventories during the quarter.
EBITDA Margin at 14.5% was driven by richer product mix in the motorcycle segment (>125cc constituted 63% of BAL’s total motorcycle sales in Q3FY2009).
The road ahead
Outlook for the domestic two-wheeler industry continues to be muted due to stringent finance and rising urban penetration. Nonetheless, in the long term the segment would continue to clock around 7-8% annual growth aided by replacement demand and demand from the under-penetrated rural section.
For BAL, we have revised our volume growth estimates downwards to -15% (earlier +3%) for FY2009E while we have modeled around 7% growth in FY2010E. Further softening of raw material prices would improve margins going forward.
Hence, we expect Operating Margins to improve by 140bp in FY2010E. We estimate BAL to clock EPS (adjusted for VRS expenditure) of Rs54.8 (Rs50.8 earlier) in FY2009E and maintain Rs62.7 for FY2010E.
At Rs468, the stock is trading at 8.5x FY2009E and 7.5x FY2010E EPS. We maintain a BUY on the stock, with a target price of Rs567.
Investors could consider investing in the stock with a long-term perspective. We expect the stock to perform when there is reasonable confidence that FY2010 will see better volume growth for the two-wheeler industry on softening lending norms and interest rates.