Bajaj Auto

Bajaj is fast expanding its global presence, with nearly 30% of 1Q09 sales coming from exports, it is expanding at nearly 3x domestic growth. With potential new technology and product launches in the domestic market and superior ROE and dividend yield, on our analysis, we initiate with a Buy recommendation.

New products planned to regain domestic market share
In FY09 Bajaj plans to launch four new motorcycles in the 125+cc segment, where it has been instrumental in expanding 125+cc segment sales from 19% in FY05 to 36% in FY08 of industry sales. We feel the launches and a gradual easing of motorcycle-financing norms will help Bajaj Auto reverse the 6ppt market-share loss of the last 15 months. Technology inputs from KTM starting FY10F should be positive in the medium term, as these should strengthen Bajaj's standing in the 125+cc segment.

Export focus for three-wheelers
Bajaj has lost share in the domestic three-wheeler market for the last few years as Piaggio and Mahindra stepped on the gas. Bajaj's focus on the passenger segment and on exports offered some protection from rising competition, allowing it to record volume growth. But in 1Q09, the sharp weakness in exports coupled with TVS's three-wheeler launch and Piaggio's ramp-up led to a 18.5% sales volume decline. We believe national roll-out of more fuel efficient three-wheelers in FY09 and a ramp-up in exports to Egypt will help maintain flattish growth for the rest of FY09. The 'Lite' cargo vehicle from the new Chakan plant should be a positive in FY10.

We believe the worst was in 1Q09 results
We believe the worst in terms of financial performance is already in the 1Q09 result, which showed a 4.7% decline in PAT despite an 18.5% drop in sales volume in the highly profitable three-wheeler segment and a steep increase in input costs. We expect flat profits in FY09 and forecast a 16% CAGR for FY09-11.

Valuations look favourable - Buy
We believe the steep correction since listing post the demerger of the holding company fully reflects the weakness in Bajaj's domestic market share. We find valuations attractive at 7.7x FY09F PE for 40%-plus ROE, and we initiate with a Buy rating as we expect the attack on competition with new launches to boost market share and EPS. We peg our target price at Rs591, ie 8.5x FY10F PE adjusted for forex reserve loss of Rs6.80/share.