MUMBAI, (GPN): Bajaj Auto’s (BAL) adjusted EBITDA was in line with estimate as realization/ margin benefitted from better currency hedges, mix and lower commodity costs. Despite passing on part-currency benefit in a few weak export markets, margin was healthy at 21.8%.
While results were strong, we maintain our neutral view on the stock in the medium term, given that (1) the 2W industry could continue to lag other auto segments (BAL’s lack of scooters does not help) and (2) currency tailwinds seem to be near peak. While BAL should outperform domestic 2Ws on a low base, exports are likely to remain subdued due to volatility in user markets. For now, we maintain our estimates and HOLD rating with TP of Rs 2,415 (10x FY17E EV/EBITDA + Rs 134/sh for KTM stake).
Key takeaways from conference call:
q Domestic volume outlook: Management indicated that it is seeing strong demand for Avenger range and expects growth to remain strong. Further, 50% of the demand is from 220cc variant which is purely incremental demand
q Export markets: Many of BAL’s key export markets have oil/commodity dependence and the sharp decline in prices has led to foreign currency issues (lack of forex liquidity) in those economies. Hence these markets are seeing contraction, while Bajaj has been able to increase its market share (at the cost of Chinese players)
q Pricing environment in exports: BAL had taken price correction in export markets post devaluation of its key export market currencies and the impact has come in Q3
q Currency hedges for FY17: USD/Rs realization for exports during the quarter was Rs 66/USD (+1% QoQ) and the company expects Q4 hedges to be at Rs 67-67.5/USD. BAL typically hedges 70% of estimated exports and has started FY17 hedges at minimum rate of Rs 67/USD
q Export in-transit inventory: Management indicated dealer inventory + in transit inventory in exports is at 45-60 days
q New launches: The company has launched the V brand in the 150cc segment and CT 100B in the executive segment (priced at Rs 31k) which is Rs 4k lower than earlier launched CT100.
