Reliance Securities calls a ‘Buy’ on Bajaj Auto
CMP: Rs. 1512 Target Rs. 1840
New Discover launched to target low end customers: Last month, Bajaj Auto (BAL) launched a new variant of Discover with a price of Rs42,000. Over the years, the company has been focusing on high margin products. Though, BAL continues to do so with new launches like KTM and the new Pulsar, it is taking steps to further strengthen its position in low margin products, through which it can target a larger customer base. Considering this, the company has launched the new variant of Discover. Currently, Bajaj Auto sells more than 100,000 units of Discover every month, of which more than 65% accounts for 125CC or above category, while 35% is below 125CC. Recent launches of KTM and the new Pulsar (which will be shortly available in the showrooms) will enable the company to largely maintain its growth momentum and leadership position in this segment. Moreover, the launch of new Discover at an entry point of Rs42,000 will aid it to improve its presence in below 125CC segment.
Strong volume and margin guidance: Management has indicated that Bajaj Auto’s volume is likely to grow ~15% to 5mn units in FY2013E. The company had registered a volume growth of ~14% in FY2012, with two-wheelers and three-wheelers growing at ~13% & ~18% respectively. Growth of two-wheelers has slowed down in the last four months with yoy volume growth remaining in single digit. Management expects that the demand for two-wheelers should pick-up from May. Further, management is confident of maintaining EBITDA margin of ~20% despite the new Discover launch.
Strong growth in exports: BAL has maintained strong exports growth over the last few quarters. Export revenues have grown 40%, 50% and 51% yoy in the last three quarters driven by volume growth and higher realizations. Exports realization increased 6%, 9% and 18% yoy in the last three quarters. We believe that the recent INR depreciation is likely to aid export realization rate and enable the company to report healthy growth in exports revenues.
Outlook and Valuation: We have revised our estimates marginally upwards given the robust guidance by the Management. We have conservatively factored in a volume growth of 12% for FY2013E given the subdued demand environment currently. Further, we expect margins to decline on account of higher sales of low margin product and higher selling and marketing expenditure due to increased competition. However, we still expect the company to report strong CAGR of 15% in top-line and 13% in bottom-line during FY2011-FY2014E. We are now rolling over to FY2014 estimates, which gives us a target price of Rs1,840, indicating an upside of ~21% from the current levels. In our view, the recent correction in stock price provides a good opportunity for medium-to-long-term investors, and hence, we upgrade the stock to a Buy.
Dolat Capital calls a ‘Buy’ on Hindalco
CMP: Rs. 119 Target Rs. 140
Hindalco’s standalone profits, at 6.4bn were above our estimate and consensus of 4.95bn. Higher other income, inventory liquidation, and higher production in Copper boosted profits. Net sales rose 11.7% YoY/15% QoQ to Rs 76.4bn (Dolat est: Rs 67bn) due to destocking in aluminum division and higher sales in Copper production.
Aluminum production volumes fell 1.6% QoQ to 1,44,000 tonnes, whereas net revenues increased 11.7% QoQ due to inventory liquidation. Aluminum division’s EBIT rose 56.6% QoQ to Rs 4.83bn on the back of better LME prices. Aluminum division’s EBIT rose by 56.6% QoQ to Rs 4.83bn (Dce:Rs 4.27bn) and was also boosted by the insurance claim received due to the Hirakud outage in Q2FY12. Copper production volumes 8.3%QoQ/11%YoY to 95,000 tonnes at rated capacity as against our expectations of 85,000 tonnes due to better availability of better grade of the concentrate The copper division’s EBIT rose 35.8% QoQ/ 42.5%YoY to Rs 2.93bn (Dolat est: Rs 1.9bn).
Staff cost declined by 4.8%YoY/11.9%QoQ to Rs 2.67bn whereas other expenses also declined by 7.8% QoQ to Rs 4.54bn. It had a forex loss of Rs 290mn in Q3FY12 which was not there during the quarter.
There was no update on the projects in the presentation and the timeline of the completion of the projects. They have incurred a capex of Rs 162bn on Mahan, Hirakud FRP and Aditya Aluminum operation and is without Utkal Alumina which is under a SPV. Hindalco has received Rs 700m as return of capital from AV Minerals (Netherlands). There was forex gain of Rs30m adjusted from other expenditure.
Hindalco stock has corrected by 21% over last 3 months on back of concerns on delay in expansion plans softer LME prices, and cost pressures. Hindalco stock performance in short term will be driven by performance of Novelis and progress on expansion plans along with the progress on the Mahan Coal block. We maintain our Accumulate rating on the stock with a target price of Rs 140 per share based on SOTP.