Buy Bajaj Auto, target Rs 3,174: HDFC Securities
Buy Bajaj Auto Ltd. at a price target of Rs 3174.
The current market price of Bajaj Auto is Rs 2,477.50.
Time period given by the brokerage is one year when Bajaj Auto price can reach the defined target.
Investment rationale by HDFC Securities:
Higher contribution of entry level models (CT 100 and Platina in domestic 2W and Boxer in export) in the sales mix weighed on 2QFY19 margins for Bajaj Auto (BJAUT).
Despite 25 per cent volume growth, EBITDA rose only 3.5 per cent YoY at Rs. 13.43bn at a disappointing 16.8 per cent margin (vs est 17.3 per cent).
PAT grew by 4 per centYoY to Rs 11.52bn. Management expects nearly 150bps margin expansion in FY20 with full-year benefit of rupee depreciation.
We believe BJAUT’s intent to maintain its aggressive pricing strategy to gain nearly 25 per cent market share in domestic motorcycle segment will continue to put pressure on margin (expect EBITDA margin of nearly 17-17.5 per cent for medium term vs 3 years average of 20 per cent).
Despite sharp fall in margin net profit grew 11 per cent in 1H and we expect the company continue to post double digit earnings growth over FY18-21E aided by continued recovery in the export and market share gain in domestic bike business. Although, the M1 segment focus will be an EBITDA dilutive, it will help winning back mass/rural customers and energise dealer relations (via volume thrust).
We remain positive on BJAUT, based on (1) Growth across all the three businesses (2W, 3W and export) (2) Widest product portfolio (Pulsar, Avenger and KTM) in the premium segment, and (3) Strong exports outlook driven by availability of USD in key markets and high oil prices (tailwind) 4) Cash equivalents at nearly 20 per cent of Mcap provide scope for higher payouts.
BJAUT also deserves premium over Heromotocorp with its diversified product and geographical mix.
We cut EPS estimates by 7 per cent for FY19/FY20/21E.
Maintain BUY with a SOTP-based target price of Rs 3,174 (17x Sept 20E Core EPS + cash + 40 per cent discount for KTM stake) vs Rs 3,411 earlier.