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Weak rupee to offset Bajaj Auto’s volume slowdown

Every 1% of rupee depreciation can lead to 30 basis points margin expansion and around 1.5% increase in EPS, estimates Nomura Equity Research in its report on Bajaj Auto

Bajaj Auto’s 1QFY14 adjusted margin came in at 20.4% compared to Nomura Equity Research’s estimate of 18.6%, leading to an 11% beat at the EBITDA level. This was driven by stronger-than-estimated export realisations as the company retained most of the benefits of the rupee weakness. The brokerage expects export realisations to improve further on estimates for rupee realisation to move from 55.5 in 1QFY14 to the around 59-60 range by 3QFY14F. Nomura notes that the rupee weakened against currencies of Bajaj Auto’s key export markets in 1QFY14; thus, it may be able to retain a large part of the benefits. In line with this, the brokerage raises its FY14F EBITDA margin estimate from 18.9% to 21.7% and

22.5% for FY15F.


However, given the weakness in domestic and export demand, Nomura has lowered its volume estimates by around 7% to 4.18mn units for FY14F and 10% to 4.47mn units for FY15F. Overall, its EPS estimates are up by 9.3% for FY14F and 10.6% for FY15F.


Nomura continues to value Bajaj Auto based on 15x FY15F EPS (in line with the past three years’ average multiple) to arrive at its revised target price of Rs2,174. Nomura’s target price increase is driven by its revised FY15F EPS estimate.

Bajaj Auto has lost 3% market share in the domestic motorcycle segment over the past six months. The company’s market share was 22.6% in 1QFY14 (flattish q-o-q) compared with the 25.5%-26% levels seen in 2HCY12. The brokerage notes that Bajaj Auto had gained some market share in the executive segment in 2HCY12 post the successful launch of the Discover 125 ST and Discover 100T models. But, over the past 5-6 months, the market share has again declined in this segment. Nomura believes that the new Discover models have cannibalised volumes of older models to a great extent; therefore, Bajaj Auto was not able to sustain market share in this segment.

Further, Bajaj Auto has lost some market share in the premium segment as well—its market share has been around 37-38% in 1HCY13 compared with around 41% levels earlier. Honda has gained share in this segment, led by the continued strong performance of the Honda Unicorn and the launch of the CB Trigger in May-13. Also, Eicher’s Royal Enfield has been steadily gaining share in the premium segment—its market share was around 10% in 1QFY14 compared with the 6-8% share seen over the previous year, as per industry data.


The company plans to launch six new models (one has already been launched in July-13) in 2HFY14 targeted towards the entry and mid segments. Nomura believes that Bajaj Auto’s focus in FY14F will be towards improvement in volumes under the Discover brand. The two-wheeler major is targeting to regain lost market share from these launches in FY14F.


Nomura notes that in 1QFY14, Bajaj Auto’s margins increased by 280bps q-o-q, led largely by the benefit from sharp rupee depreciation over the past two-three months. Sequentially, dollar-rupee realisations for the company have improved from 49.55 in 4QFY13 to 55.5 in

1QFY14. The company expects export realisations to increase to 58.5 in 2QFY14 and 59 in 3QFY14, which could lead to further margin expansion,. According to Nomura’s analysis, every 1% of rupee depreciation can lead to 30bp margin expansion and around 1.5% increase in EPS.


The brokerage notes that the rupee has depreciated against currencies of Bajaj Auto’s major export markets in FY14 so far; thus, the company can retain a large part of the benefit from the rupee depreciation against the dollar.

Nomura has cut its volume estimates by 7% for FY14F and 10% for FY15F, largely due to the cut in its estimates for the two-wheeler segment. In the domestic motorcycle industry, volumes have been weak and declined by 4% y-y in 1QFY14. For Bajaj Auto, volumes have declined by 7.6% due to the loss of market share in both premium and executive segments.


As per Nomura’s dealer survey, the demand environment remains weak and is unlikely to see any major uptick in the next few months. Therefore, the brokerage has cut its domestic two-wheeler volume estimates by around 8%—it now expects a 4% y-y decline in volume in FY14F. Even in the motorcycle exports segment, it has cut its volume estimates by around 9%; and now expects flattish volume in FY14F.


The brokerage has not made any significant changes to its volume estimates for the three-wheeler segment. Overall, it expects around 1% volume decline for the company in FY14F – this implies a 1.6% growth in the remaining nine months of FY13F.


Nomura has increase its EBITDA margin estimates by 280bp for FY14F and 350bp for FY15F as it expects the impact of higher export realisations due to the sharp rupee depreciation over the past two-three months. It earlier expected dollar-rupee rate of 55, compared with 50 in FY13, and 50% pass-through of the benefit to customers. Export realisations in 1Q came to 55.5 and the company expects this to increase to the 59 level in 3Q. Nomura now expects export realisation of 58 in FY14F and 59.5 in FY15F.


As a result, Nomura has increased its EBITDA margin estimates to 21.7% for FY14F and 22.5% for FY15F.


Overall, Nomura has increased its EPS estimates by 9% for FY14F and 11% for FY15F. Its

FY14-15F EPS estimates are 4-5% above consensus estimates. It expects consensus to raise margin estimates post the strong 1Q results.


Nomura continues to value Bajaj Auto at 15x FY15F EPS estimate of INR144.9 (largely in line with the company’s past three-year average multiple) to arrive at our one-year forward

target price of Rs2,174. Its valuation methodology remains unchanged. It has increases its target price by around 11% (from Rs1,966) due to the 11% increase in our FY15F EPS estimate.


Despite the likely weakness in volumes in FY14F (a 1% decline), Nomura continues to value

Bajaj Auto at 15x one-year forward EPS as expects the company to deliver a strong 17% EPS CAGR over FY13-15F led by margin expansion. Other auto companies such as Maruti Suzuki and Exide Industries are also currently facing volume pressure in their respective segments but are still trading at close to historical mean valuations due to expectations of strong earnings growth, according to Nomura.


Bajaj Auto’s 1QFY14 adjusted PAT came in at Rs8.06bn, which was around 10% ahead of Nomura’s and consensus estimates. The beat was led by higher-than-expected EBITDA margin. EBITDA margin was at 20.4%, above the brokerage’s estimate of 18.6%. This was driven by higher export realisations, which improved by 26% y-o-y, compared with its estimate of 18%. This led to overall ASP coming in higher by 1% compared with Nomura’s estimates. Nomura expected dollar-rupee rate of around 55, compared with around 50 in 4QFY13 and a 30% pass through of the gains to customers from this. However, actual dollar-rupee realisation was 55.5 in 1QFY14, according to the company.


There was an MTM forex loss of Rs0.96 billion in this quarter; Nomura’s numbers are adjusted for the same.


Diesel under-recoveries could soon be history, says Nomura

With continued diesel and petrol price hikes, the oil subsidy problem does not look that menacing now, says Nomura Equity Research in its note on Indian oil PSUs

This year, the Government of India (GoI) has surprised with several steps, including monthly diesel price hikes and controls on subsidised product volumes, among others. More importantly, it has shown resolve to maintain the momentum. Consequently diesel under-recoveries could soon be history for oil PSUs (public sector units). This is according to a note prepared by Nomura Equity Research. On related issues, Nomura points out that direct benefit transfers for LPG have commenced, and this should help to curb cooking fuel subsidies. Gas price hikes are also positive.


Assuming a rupee-dollar rate of 60 (vs 55 earlier), Nomura estimates that U/Rs (under-recoveries) are declining by 56% by FY16F. At INR/USD of 58, Nomura expects diesel U/Rs to vanish and total U/Rs to fall to a third of FY13 levels. U/Rs have been a bane of oil PSUs for many years and declines are a long-term positive.


Nomura has made a ‘BUY’ recommendation for the GAIL scrip in the stock market as tariff cuts, volume declines, and gas price hikes are largely over and already priced in by the investors in the stock market. For ONGC and OIL, despite the short-term earnings fillip Nomura sees from lower subsidies and higher gas prices, their production volumes continue to disappoint and growth visibility remains low. Nomura has upgraded ONGC and OIL shares to ‘Neutral’.


With the GoI showing strong resolve to bring reforms, Nomura believes that the oil subsidy problem looks less menacing than before. Nomura forecasts that earnings predictability for OMCs (oil marketing companies) remains low.


The following table gives the stock market recommendations for oil PSUs from Nomura:

Similarly the summary valuations and financials for the oil PSUs are as follows:


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