We initiate coverage of Bajaj Auto, the second largest two-wheeler (2W) manufacturer in India.
Our checks with dealers in export markets reveal that export growth – a cushion against domestic under-performance – is likely to reduce with the global slowdown.
We believe that in Sri Lanka and Bangladesh, where Bajaj has a strong foothold, there is stagnation in the market, while other key markets such as Indonesia and South America are facing an overall slowdown.
We expect export growth to slow down to 15% in FY10, after reporting 54% CAGR in the past three years.
H2FY09 margins are expected to be under pressure due to operating deleverage on volume declines. For FY10, we are building in 50bp EBITDA margin expansion on falling commodity prices.
Margin expansion potential is muted in the absence of volume growth and the resultant pressure to pass on cost savings to customers.
We believe that a significant decline in volume in the domestic market and slowdown in export volume in the near to medium term would cause further correction in the stock price from current level.
In Q3FY09, we expect a 50% y-o-y decline in earnings. We would not be buyers of the stock despite its relatively cheap valuation of 6.7x FY09 EPS unless we see a fundamental improvement in the domestic business or global demand.
Our target price of Rs267 is based on a DCF-based valuation, translating to 5.8x FY09 EPS.