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Domestic motorcycles growth to remain in single digits in FY2013
The domestic motorcycle market slowed down considerably in Q4FY2012. The growth rate moderated from a healthy 17.3% in Q1FY2012 to 6.3% in Q4FY2012. The motorcycle segment has been witnessing demand slowdown on account of the economic slowdown, reduced farm income and higher interest rates. Given the current slowdown in the economy, we expect the domestic motorcycle segment to record a single digit growth in FY2013 with the second half contributing the major share. The management retains FY2013 guidance at 5 million units.
Competitive intensity to remain stable but turn aggressive over next few years
Honda would be the game changer in the Indian motorcycle space. The recent launch of its first low cost mass market bike Dream Yuga with brand ambassador Akshay Kumar has gained heightened visibility. Also Suzuki and Yamaha have planned capacity expansion to increase presence. The company is not yet reacting to Honda's threat considering that the Dream Yuga is priced at a premium. However the competitive landscape can turn aggressive over the next few years.
Overall exports to remain buoyant but Sri Lankan market impacted by higher duty
Sri Lanka recently increased import duty on motorcycles and three-wheelers. The increase in the duty has been steep leading to an about 30% increase in the cost for the end consumer. Sri Lanka is a huge market for Bajaj Auto, accounting for about 13% of its exports. The management expects the exports to Sri Lanka in the month of May 2012 to be nil and recovery in volumes to take about three to four months. The management expects customers to take the higher pricing but the market may moderate significantly.
Other markets such as Nigeria, Latin America, Iran and Bangladesh are expected to grow strongly and there is no threat of higher custom duty by these countries. Nigeria forms 60% of total sales in Africa where volumes can grow from 50,000 units to 100,000 units. In H2FY2013, the company plans to venture into Argentina with the Pulsar and the Discover.
Rupee depreciation unlikely to benefit in FY2013; FY2014 expected to see significant jump
The rupee depreciation against the US dollar is unlikely to boost export realisations in FY2013 as the company has already covered FY2013 exports in the band of Rs48-51. However given the current INR rate of Rs54.5/dollar, Bajaj Auto would initiate covers on FY2014 exports at a significantly higher rate, thereby causing a significant jump in export realisations. The total export hedges taken for the next one year are to the tune of $1.4 billion.
Valuation: Upgrading to Hold from Reduce but weakness would persists in short term
We had earlier given a Reduce rating to Bajaj Auto with a target of Rs1,610. As per yesterday's closing price, the stock has fallen to Rs1,533 per share, thereby meeting our target price.
We revise our recommendation from Reduce to Hold on account of the launch of three new products in the domestic market as well as expectation of improved export earnings in FY2014.
We have been conservative in our FY2013 volume expectations for the company at 4.78 million units. We expect a 9.9% year on year (YoY) growth in volumes in FY2013 against the management's guidance of 5 million units, thereby expecting the FY2013 profit after tax (PAT) growth to be at a mere 6.1% post the higher incidence of tax. The key reason for our upgrade is a significant increase in export realisations from Rs47-Rs50 band in FY2013 to Rs53-Rs57 band in FY2014E. We estimate FY2014's earnings per share (EPS) growth at 17.5% to Rs135.2 per share. As we apply the conservative multiple of 12.5x to FY2014E earnings, we see some upside in the stock from the current levels. However we remain cognizant of a significant slowdown coming through in H1FY2013 and recommend a Hold at the current price with a target price of Rs1,690 per share.
Piramal Health acquires DRG; upgrade to Buy
Key points
Piramal Healthcare acquires Decision Resources Group for $635 million
Piramal Healthcare (Piramal Health) has announced to acquire a US based company called Decision Resources Group (DRG) for a consideration of $635 million (Rs3,400 crore). DRG is engaged in healthcare information and analytics and has been growing at a compounded annual growth rate (CAGR) of 20% over past five years. It is expected to generate revenue of $160 million in CY2012. The funding for the acquisition would be done through a mix of debt and equity (in the ratio of 1:1). The deal is likely to get closed by June 30 2012. Post-acquisition, DRG will operate its business independently with existing management teams and clients base.
A balancing act
Most of the new business verticals created by Piramal Health during the past few months (after the sale of the domestic formulation business to Abbott) have been built with a long-term view and therefore the company needed to do some balancing act. With the acquisition of DRG , Piramal Health will have a steady flow of cash from day one and an opportunity to tap the unmet demand in the healthcare information, analytics, and consulting segment. We consider it a positive step, as it will de-risk part of its business based on research and development (R&D), which generally has long gestation period and also the venture capital business (through IndiaReit) which is volatile in nature.
We revise revenue estimates, targets and upgrade stock to Buy
