To counter the sluggishness in the Indian auto industry, Bajaj Auto Limited (Bajaj) is increasing its focus on exports.
During Q109, the share of exports rose to 32% of total sales, as against 26.2% in Q108. This share is expected to rise even further as it plans to export around 850,000 units in FY09, on the back of several product launches and an expanding distribution network.
Given a scenario of rising inflation (11.91% for the week ended 5 July, 2008), the raw material costs are likely to increase. With steel prices expected to rise further and tyre manufacturers planning to hike prices again, we expect margins to decline in FY09.
Also, Tata’s Nano, which is expected to hit the roads by the end of 2008, is likely to affect the two-wheeler market. However, it is too early to predict the impact on this market.
At the current market price, the stock trades at a forward P/E of 8.3x and 7x for FY09E and FY10E, respectively. Based on our valuation, we believe that the stock is fairly valued at the current levels and thus, reiterate our HOLD rating.