Superlative Performance; Robust Guidance

Bajaj Auto's (BJAUT) Q3FY11 results with a reported profit of Rs6.7bn were ahead of our profit estimates of Rs6.1bn. The price hikes taken during the quarter and a richer product mix helped the company maintain its per vehicle EBIDTA at ~Rs9k/ unit. Due to high cash accruals, other income almost tripled to Rs1bn. Adjusted profit increased by 40.4% YoY to Rs6.7bn.

On a high base, volume growth normalises: BJAUT posted an impressive 50% volume growth in the preceding four quarter aided by a combination of new launches and low base effect. Now on a high base, volume growth normalised to 17% at 0.95mn units. Domestic motorcycle sales were up 22.6% (0.6mn units) as against industry growth of 28.7%, thus losing 130bps marketshare. Domestic 3-wheeler sales were up 10.9% to 52k units. Exports growth was subdued at 8.3% to 297k units.

Rich product mix and price hikes help sustain margins: Motorcycle segment growth has been driven by high margin products Pulsar and Discover. In Q3FY11, 125cc motorcycles accounted for 50% of the total sales as against 32% in Q3FY10. This coupled with price hikes undertaken to pass on the input cost pressure led to a 8.3% growth in realisations to Rs44k/unit. Raw material cost pressure was evident as cost per vehicle increased 13% YoY to Rs31.5k/unit. Margins declined 160bps YoY to 20.3% even as EBITDA per vehicle was constant at Rs9k/unit. Adjusted profit grew by 40.4% to Rs6.7bn.

Management guidance:

The management has guided for a volume of 4.8mn units in FY12. However on a conservative basis we expect the company to achieve volume of 4.5mn units. We expect the company to hold margins at current levels and maintain our earnings estimates for FY11 and FY12 at Rs89 and Rs103 respectively.

VALUATIONS AND RECOMMENDATION

The stock has taken a beating in the last month and is trading at attractive valuations of 12.8x FY12E earnings. We reiterate `BUY' rating while maintaining our target price of Rs1,855 discounting FY12E earnings 18x.