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Edelweiss Research report on Bajaj Auto

From : Rakhi at 05:48 PM - Jul 13, 2007 ( )

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Edelweiss Research report on Bajaj Auto:

Bajaj Auto’s Q1FY08 results were lower than ours and consensus estimates. Adjusted net  profit was down 18.1% Y-o-Y to Rs 2.26 billion. EBITDA fell 23.7% Y-o-Y to Rs 2.75 billion.  EBITDA margins were at 13.1%, down 330bps Y-o-Y.  We believe the margin outlook for the next 2-3 quarters is much better and margins are expected to improve to ~ 15% on account of price revisions, ramp up of Uttarakhand  plant, and launch of a new bike (on September 9, 2007) that is likely to be much more  profitable than the company’s other low-end products in the segment. We are upgrading our recommendation on the stock to ‘ACCUMULATE’, post the recent price correction and improving margin and volume outlook for its core business.

Key Highlights 

Lower than expected results in Q1FY08

Net sales (at 21.09 bn), were down 4.2% Q-o-Q, primarily on account of falling volumes, though average realisations improved 8.5% Y-o-Y on the back of improving product mix. EBITDA fell 23.7% Y-o-Y to Rs 2.75 billion and EBITDA margins were at 13.1%, down 330bps Y-o-Y. Adjusted net profit was down 18.1% Y-o-Y to Rs 2.26 billion. Further, staff costs, as a percentage of sales, increased 80bps Y-o-Y due to  bonuses and increments given in the quarter. In addition, other expenses increased 44bps because of higher advertising expenditure. 

Margins set to improve 

We expect the company to improve its margins to ~15% in the second half of FY08  on back of price revisions, ramp up of Uttarakhand plant, and launch of a new bike  that is likely to be much more profitable than the company’s other low-end products in  the segment. The new bike’s contribution to the company will be similar to that of  Discover. We expect at least 70bps improvement in margins only from lower staff  costs on account of non-recurring items worth INR 150mn. 

Valuation 

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