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Bajaj Auto

Bajaj Auto - Results Update.
Strong sequential volume growth helps Bajaj maintain margins despite raw material pressures.

Bajaj reported 3QFY10 PAT of Rs4.75 bn (up 189% yoy and 18% qoq), was in line with our estimate of Rs4.69 bn. 3QFY10 EBITDA margin at 22.9% grew 760bps yoy and 10 bps qoq versus 22.4%. The margin upside was driven by higher-than-expected other operating income, which includes export incentives. Average realizations declined 4% on a yoy and qoq basis, driven by the higher proportion of the newly launched Discover 100cc. Raw material costs as a percentage of sales increased by a larger-than-expected 300 bps, some of which must have been driven by the lower realization. 3QFY10 volumes grew 64% yoy led largely by the newly launched Discover100cc volumes and improvement in export and 3-wheeler volumes. Bajaj Auto will likely benefit from the Pulsar 135cc launched in December going forward on a sequential basis.

New launches to drive domestic volume growth in FY2011E; expect strong exports.

Bajaj’s volumes can be expected to grow 18% in FY2011E and 10% in FY2012E. The FY2011E volume growth to be driven largely by new launches in the 2W & 3W segment. Domestic volume growth will be strong as the company gets the full year benefit of Discover 100 cc and newly launched Pulsar 135cc. Besides, the success of the commercial vehicle RE-600 could continue well into the next fiscal. Expect strong export growth led by (1) recovery in global economies and (2) Bajaj’s strong focus on consolidating in existing markets and developing newer markets.

The key risks could be (1) disproportionately larger impact from Honda’s 110 cc bike to be launched in 4QFY10 and (2) higher-than-expected increase in raw material prices resulting in significant decline in operating margin.

The FY2010E and FY2011E EPS estimates are at Rs110 and Rs134.Hence long term investors can buy on declines, with a two year perspective.