Bajaj Auto : (Buy)

27th May. ‘08 / CMP: Rs.596 / Target: Rs.992

Expect 6% volume growth in FY09:

In FY09, we expect Bajaj Auto (BAL) to register volume growth of 6%
in motorcycles, 20% in scooters and 5% in three-wheelers. We estimate
14.4% growth in FY09 total income driven by: (1) continued
improvement in product mix towards the executive and premium
models, boosted by new launches in these segments, (2) higher
production at Uttaranchal plant - up from 275,000 units in FY08 to
500,000 units in FY09 - where BAL has excise duty and income tax
benefits (BAL will also manufacture the more profitable XCD at this
plant in FY09 in addition to the Platina), and (3) improved realizations
due to the recent 1-2% increase in prices to combat higher input costs.
19% growth in PAT:

We expect BAL to register an EBITDA margin of 14% in FY09 (14.5%
in FY08). Although higher input costs would pose a threat to margin,
we expect BAL to balance the impact through price increases, higher
production at the Uttaranchal plant, productivity improvement and
cost reduction. We expect PAT to grow 18.9% to Rs.9.9bn in FY09 on
the back of a 14.4% growth in revenue.

Exports to remain strong growth driver:

Bajaj Auto has been registering robust growth in exports - volumes
have increased at a 46% CAGR over FY05-08.We expect this growth to
continue, driven by Bajaj Auto's reach into various African, South
Asian and Latin American markets. Scaling up of operations in Indonesia
will provide further access into the South East Asian markets, which
will also drive growth in exports. We expect Bajaj Auto's exports to
increase at 22.5% CAGR over FY08-10 to 922,959 units.
Bajaj Auto's 4QFY08 performance (Volume decline
continues):

Volumes declined 12.1% in 4QFY08 (two-wheeler and three-wheeler
sales declined 11.2% YoY and 17.7% YoY respectively). However,
realization in 4QFY08 increased 2.2% over 9MFY08 due to relatively
higher proportion of three-wheeler sales (12.6% as against 11.7%
in 9MFY08) during the quarter.

CMP: current market price

YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (Rs.mn ) (Rs.mn ) (Rs.) GROWTH (%) ( X ) ( X ) ( %) %) SALES EBITDA
3/08A 90,462 8,352 57.7 10.3 5.4 47.6 41.0 0.9 6.2
3/09E 103,456 9,929 68.6 18.9 8.7 3.8 44.0 37.5 0.7 5.0
3/10E 115,963 11,549 79.8 16.3 7.5 2.8 37.9 35.5 0.5 3.7
Outlook for FY09:

In FY09, we expect Bajaj Auto to register volume growth of 6% in
motorcycles, 20% in scooters and 5% in three wheelers. We estimate
14.4% growth in FY09 total income driven by: (1) continued
improvement in product mix towards the executive and premium
models, boosted by new launches in these segments, (2) higher
production at Uttaranchal plant - up from 275,000 units in FY08 to
500,000 units in FY09 - where BAL has excise duty and income tax
benefits (BAL will also manufacture the more profitable XCD at this
plant in FY09 in addition to the Platina), and (3) improved realizations
due to the recent 1-2% increase in prices to combat higher input costs.
The company manufactured 275,000 (Platina) units in FY08. In FY09,
this would be nearly doubled to 500,000 units with the more profitable
XCD also being manufactured. Our current realization assumption
does not factor in any price reduction in the model post shifting of
production to Uttaranchal. While the management has guided for flat
volumes in FY09, we believe Bajaj Auto will be able to register higher
volume growth of 6% in FY09. This will be on the back of higher threewheeler
sales following the launch of two new three wheeler models
(one each in the passenger and the goods segments), further rampup
of exports, and improvement in the two-wheeler industry volume
2HFY09 onwards due to low base of the previous year and possibly of
the demand getting released.

Reinitiate coverage with Buy:

Though the domestic volume growth for the two-wheeler industry
looks challenging, we believe export volume growth, revival in threewheeler
volume growth, new product launches and excise and tax
benefits would lead to a 19% growth in PAT for BAL in FY09. The stock
trades at 8.7x FY09E EPS of Rs.68.6 and 7.5x FY10E EPS of Rs.79.8. We
reinitiate coverage with a Buy and a target price of Rs.992 (14x FY09E
earnings and Rs.31/share investment in KTM Power Sports AG).
(Motilal Oswal Report)