JUNE 23, 2014 Economy News The government has approved a steep hike in the train fares and freight rates. Effective from June 25, fares of all classes are set to rise by 14.2 per cent, while the freight rates will go up by 6.5 per cent. (ET) The government has called a second high-level meeting today to discuss ways to bail out the sugar industry from Rs. 110 bn dues to sugarcane growers. (ET) Pharmaceutical companies might be up for stricter price regulations. The government is planning to bring in a legislation that would take into consideration pricing models across the US, European Union (EU), China and 14 Organisation for Economic Co-operation and Development (OECD) countries. (BS) The Indian Stainless Steel Development Association has called for an increase in basic custom duty rates on stainless steel flat products to 15 per cent from the existing 5 per cent. (BL) Corporate News Essar Oil board to meet today to consider the proposal to delist the company from both the BSE and the National Stock Exchange. (BS) Power Finance Corp has received shareholders' approval for raising up to Rs 440 bn crore through issue of securities in the current financial year. (BS) Bank of India has requested Rs 20 bn fund infusion from the government to meet capital requirement for the current fiscal. (BS) The Petroleum Ministry has 'informally' asked Reliance Industries to withdraw the arbitration case it has filed against the Government disputing the decision to postpone implementation of the revised gas price guidelines. (BL) After the turnaround of the Dolvi plant, JSW Steel plans to focus on expansion of the unit. the company has decided to enhance capacity initially to 5 million tonnes from the current 3.3 million tones, for a Rs. 33 bn investment.(BL) Arvind Lifestyle Brands, a subsidiary of Arvind Ltd, is in talks with American fashion brand Gap to bring the brand to India. (BL) The government plans to kick off its disinvestment drive with the dilution of a 5% stake in Steel Authority of India that will fetch about Rs 20 bn at current market prices.(ET) Auto parts maker Motherson Sumi is looking to tap into the overseas bond market to raise $500 million in euro-denominated bonds. (ET) Consumer goods maker Emami Ltd has acquired sanitary napkin brand She Comfort from Mumbai-based Royal Hygiene Care Pvt. Ltd for an undisclosed sum. (Mint) General Electric Co. says the board of France's Alstom SA has approved GE's $17 billion offer to buy Alstom's power generation business including in India.(Mint) Equity % Chg 20 Jun 14 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index NIFTY Index BANKEX Index BSET Index BSETCG INDEX BSEOIL INDEX CNXMcap Index BSESMCAP INDEX 25,106 7,511 17,197 9,149 15,603 11,114 10,575 9,761 (0.4) (0.4) (0.4) 0.0 (0.8) (0.5) (0.7) (0.8) 1.7 2.0 (1.9) 8.4 5.6 (3.7) 1.1 6.9 15.4 15.7 24.6 3.1 36.5 22.4 29.3 42.9 World Indices Dow Jones Nasdaq FTSE NIKKEI HANGSENG 16,947 4,368 6,825 15,349 23,194 0.2 0.2 0.3 (0.1) 0.1 2.1 4.4 0.1 6.5 1.5 4.0 2.1 4.1 8.3 8.7 Value traded (Rs cr) 20 Jun 14 % Chg - Day 2,952 16,065 NA (22.1) (5.9) NA Cash BSE Cash NSE Derivatives Net inflows (Rs cr) 19 Jun 14 % Chg MTD YTD (436) 217 (233) (62) 10,833 482 22,230 (9,903) FII Mutual Fund FII open interest (Rs cr) FII FII FII FII Index Index Stock Stock 19 Jun 14 % Chg 14,092 70,328 55,040 4,509 0.3 2.5 (0.0) 1.4 Futures Options Futures Options Advances / Declines (BSE) 20 Jun 14 Advances Declines Unchanged A B T 57 135 3 713 976 52 517 552 42 Total % total 1,287 1,663 97 Commodity 42 55 3 % Chg 20 Jun 14 1 Day 1 Mth 3 Mths Crude (NYMEX) (US$/BBL) 107.2 Gold (US$/OZ) 1,314.6 Silver (US$/OZ) 20.9 0.4 0.1 0.9 2.7 1.7 7.2 7.8 (1.7) 2.6 Debt / forex market 20 Jun 14 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 8.7 60.2 8.7 60.1 8.9 58.6 8.8 61.3 Sensex 26,000 23,875 21,750 19,625 Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange 17,500 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 MORNING INSIGHT June 23, 2014 BAJAJ AUTO LIMITED (BAL) COMPANY UPDATE Arun Agarwal [email protected] +91 22 6621 6143 PRICE: RS.2180 TARGET PRICE: RS.2361 RECOMMENDATION: ACCUMULATE FY16E P/E: 14.8X BAL's market share in the domestic motorcycle industry has been steady over the past few months. Company continues to focus on improving Discover volumes in order to regain lost market share. Recovery in the economy is expected to improve prospects of the sports bike category and we expect the company to benefit from this on account of its dominance in this segment. 3W sales are expected to receive boost from new permits and lifting of ban in Egypt. Further ban lift in Egypt improves export growth visibility for BAL. We continue to stay positive on Bajaj Auto with revised price target of Rs2,361 (earlier Rs2,210) and rate the stock as ACCUMULATE (BUY earlier). Summary table (Rs mn) FY14 FY15E FY16E Sales 201,495 226,231 258,899 Growth (%) 0.8 12.3 14.4 EBITDA 41,057 46,703 53,842 EBITDA margin (%) 20.4 20.6 20.8 PBT 46,334 52,544 60,446 Net profit 32,424 37,024 42,695 Adjusted EPS (Rs) 112.1 127.9 147.5 Growth (%) 6.5 14.2 15.3 CEPS (Rs) 118.3 134.6 154.6 BV (Rs/share) 332.0 396.1 485.2 Dividend / share (Rs) 50.0 50.0 50.0 ROE (%) 37.0 35.1 33.5 ROCE (%) 52.5 49.5 47.0 Net cash (debt) 89,874 111,763 136,104 NW Capital (Days) (10) (11) (11) P/E (x) 19.5 17.0 14.8 P/BV (x) 6.6 5.5 4.5 EV/Sales (x) 3.0 2.4 2.0 EV/EBITDA (x) 14.7 11.6 9.7 Source: Company, Kotak Securities - Private Client Research Domestic motorcycle market share steady, company trying to up the ante After witnessing a significant drop in market share in the domestic motorcycle segment in 2013, market share so far in 2014 have been steady. Since January 2014, BAL's domestic motorcycle segment market share has broadly been ranging between 18-18.5%. Company's efforts to move market share to earlier levels of 23-24% has still not yielded desired results. Discover volumes have been a concern area for the company. Despite launching various versions/models under the Discover brand in the past few quarters, volumes did not witness any remarkable improvement. Recovery in Discover volumes is critical for market share gain as Discover brand is part of the segment, which accounts for majority share of the overall 2W volumes. Further, given the fact that Pulsar already is dominant brand in its segment with significant market share, scope for further market expansion will be limited in the 150 cc+ segment. Given high competitive scenario in the executive motorcycle segment, gaining market share will be a challenging task for BAL. Over the medium to long term, we expect Discover volume improvement to largely be on the back of improvement in demand sentiments. Bajaj Auto - Domestic motorcycle volume and market share 250000 Volumes (Units) Market Share (%) 30 200000 24 150000 18 100000 12 50000 6 0 0 Source: SIAM Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2 MORNING INSIGHT June 23, 2014 Volumes in the premium/sports segment (125cc plus) tends to get more impacted during economic downturns. Strong presence in this segment hurted BAL's volumes over the past two years. In the 125cc-250cc segment, volumes declined by 17% in FY13 and stood almost flat in FY14, as against 3.5% growth registered by the sub 125cc segment in FY13 and FY14. We believe, revival in the economic situation will lead to strong demand for the premium/sport motorcycles and that should aid volume growth for Bajaj Auto over the medium to long term. We expect BAL's motorcycle volumes to post single digit growth in FY15 and pick-up strongly in FY16. We expect CAGR volume growth of 11% over FY14FY16 in the domestic motorcycle segment. 3W sales expected to benefit from new permits Lack of new permits coupled with general weak demand led to sharp decline in domestic 3W volumes. Though going ahead in FY15, situation looks positive. Few months back, Maharashtra government granted ~80,000 new permits. We expect these new permits to translate into sales for the company over the course of FY15. Given BAL's dominance in the city permit 3W space, a large chunk of permit driven 3W demand is expected to flow to the company. In FY15, company hopes to sell ~225,000 3W's in the domestic market, translating into volume jump of 20%. If these new permits translate into demand, the target is achievable. Bajaj Auto - Domestic 3W volumes (Units) 250000 200000 150000 100000 50000 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: SIAM 3W exports over the past couple of years suffered from issues related to certain geographies. Ban from Egypt impacted company's performance for 3-4 months. However, with reversal of the ban, 3W exports are expected to improve from June 2014 onwards. Bajaj Auto - Export 3W volumes (Units) 350000 280000 210000 140000 70000 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: SIAM Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3 MORNING INSIGHT June 23, 2014 We thereby expect robust volume growth in the 3W segment over FY14-FY16E. Egypt ban lift will give additional impetus to exports In difficult domestic environment, exports provided some sort of support to volumes in FY14. Exports over the past few years have gained prominence for the company. This is clearly visible from the fact that the share of exports in the overall volumes moved up from 31% in FY11 to 41% in FY14. For the couple of months of FY15, exports accounted for ~45% of the overall volumes. However, exports over the past couple of years have faced challenges from certain geographies(Sri Lanka, Egypt, Nigeria), impacting volumes. Despite that, the company has been able to post volume growth for the past 10 consecutive months. Market share gain in existing markets and entry into new geographies has aided export growth. Lifting of ban from Egypt is expected to provide additional boost to exports volumes in the coming months. Due to ban in place, BAL did not export for nearly 3 months to Egypt - a key market for them. On a monthly basis, BAL exports ~6,000 three wheelers and ~4,000 motorcycles to Egypt. Lifting of import ban in Egypt enhances export growth outlook visibility. We remain largely optimistic about robust performance in exports, going forward. Bajaj Auto - Export Volumes (Units) 2000000 1500000 1000000 500000 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: Company Bajaj Auto - Rising share of export in volume mix (%) 50.0 40.0 30.0 20.0 10.0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 YTD Source: Company, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4 MORNING INSIGHT June 23, 2014 Margins expected to stay broadly stable We expect BAL's operating margins to largely stay stable between the 20-21% range. Concerns emanate from possible INR appreciation going ahead. With regards to FY15, BAL has covered 65% of the expected exports at around Rs60/USD which is in line with the company policy. Generally, the company hedges 70% of the expected export exposure, 10% exposure enjoys natural hedge (on account of imports) and for the balance 20%, exposure remains open and the company realizes spot rate. For FY16, the company has started hedging at lower end of Rs60/USD. Thereby, with hedges in place, we do not see any significant impact in the event of INR appreciation in FY15. For FY16, the company has started to hedge and in our opinion there are margin expansion levers to counter any negative impact related to currency.Demand recovery for premium/sports bike, improved pricing scenario and better demand leading to control over marketing cost are some of the factors that can be positive for margins in FY16. Valuation At CMP of 2,180, the stock trades at a PE of 17x and 14.8x its expected FY15 and FY16 earnings respectively. We recommend ACCUMULATE on Bajaj Auto with a price target of Rs.2361 Kotak Securities - Private Client Research We have marginally raised our FY15 EPS to Rs127.9 (earlier Rs126.5) and FY16 EPS to Rs147.5 (earlier Rs147.3). We revise our stock price to Rs2,361 (earlier Rs2,210), valuing the stock at 16x (earlier 15x) its expected FY16 earnings. We raise our PE multiple on account of improved visibility in export growth led by lifting of ban from Egypt. We rate the stock as ACCUMULATE (BUY earlier). Please see the disclaimer on the last page For Private Circulation 5 MORNING INSIGHT Bulk deals June 23, 2014 Trade details of bulk deals Date Scrip name Name of client Buy/ Sell Quantity of shares Avg. price (Rs) 20-Jun Aagam Cap Animesh K Patel B 30,000 159.8 20-Jun Acclaim Ind Avinash Gupta B 34,600 2.1 20-Jun Acclaim Ind Vimal C Shah HUF S 49,000 2.1 20-Jun Ace Edutrend Lilac Farms Pvt Ltd B 88,505 40.0 20-Jun Ace Edutrend Cherry Cosmetics Pvt Ltd S 125,000 40.0 20-Jun Ace Edutrend Narayan Bhagwandas Jaju B 75,000 40.0 20-Jun Ace Edutrend Rekha Bhagwandas Jaju B 75,000 40.0 20-Jun Ankush Finstock Veena Rajesh Shah S 34,129 7.0 20-Jun Ankush Finstock Pankajbhai Shah Ankit B 32,510 7.1 20-Jun Avance Tech Navinchandra H Gajjar S 4,284,566 0.3 20-Jun Bhageria Dye Alken Management & Financial Ser S 49,090 68.0 20-Jun Blazon Marbl Kailash Ficom Ltd S 501,440 20.3 20-Jun Dujodwala Paper Praghnaben Bhupendrakumar Shah B 34,721 12.1 20-Jun Eastern Treads Equity Intelligence India Pvt Ltd B 40,000 23.2 20-Jun Freshtrop Fruit Motilal Gopilal Oswal S 64,000 30.5 20-Jun Goldstone Tech Kunal Madhusudan Dalal B 154,008 9.9 20-Jun Goldstone Tech K Ajay Kumar S 129,741 10.3 20-Jun Golechha Glob Saroj Gupta B 32,426 11.3 20-Jun Golechha Glob Anurag Gupta HUF S 45,000 11.3 20-Jun Gujarat Medi Rahul Kamalkant Parasrampuria S 32,450 5.7 20-Jun Inland Print Ashadeep Multi Trade Pvt Ltd B 150,000 6.4 20-Jun Inland Print Radiance Exim Pvt B 60,000 6.8 20-Jun Inland Print Inland Dataforms Pvt Ltd S 272,900 6.5 20-Jun Mahadushi Int Narender Ahirwar S 31,570 555.4 20-Jun Naisargik Agri Chaman Lal Gogia B 40,000 151.2 20-Jun Punjab Comm-$ Varmora Kamlesh Dineshbhai B 61,145 100.0 20-Jun Rcl Retail Banthia Fintrade Pvt Ltd S 87,000 20.2 20-Jun Rcl Retail Ratan Chand Lodha (HUF) B 78,000 20.2 20-Jun Rushil Decor Apurva International S 72,500 70.7 20-Jun Sanghi Corp Nishma Ashokkumar Sanghi B 19,000 12.4 20-Jun Sanghi Corp Pravin Hastimal Punamia S 19,000 12.4 20-Jun Sharyans Res Orange Mauritius Investments Ltd B 630,000 38.5 20-Jun Sharyans Res Fidelity Multitrade Pvt. Ltd. S 621,588 38.5 20-Jun Sowbhagya Med M K Ravindra Babu B 56,850 10.9 20-Jun Spicejet MV Scif Mauritius S 2,713,429 17.8 20-Jun Super Sales-$ Paramount Fintrade Pvt.Ltd. S 16,500 420.2 20-Jun Texmo Pipes Rashmidevi Agrawal B 137,000 11.6 20-Jun Vision Corp Morries Trading Pvt Ltd B 100,000 1.0 Source: BSE Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) 2,680 3.0 NA 1.3 372 1.4 NA 3.2 1,866 1.3 NA 1.2 Gainers United Spirits Cairn India Axis Bank Losers M&M 1,144 (2.7) NA 0.7 Tata Power 101 (2.7) NA 7.0 Hindalco Ind 164 (2.4) NA 8.8 Source: Bloomberg Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6 MORNING INSIGHT June 23, 2014 Fundamental Research Team Dipen Shah IT [email protected] +91 22 6621 6301 Saday Sinha Banking, NBFC, Economy [email protected] +91 22 6621 6312 Ritwik Rai FMCG, Media [email protected] +91 22 6621 6310 Jayesh Kumar Economy [email protected] +91 22 6652 9172 Sanjeev Zarbade Capital Goods, Engineering [email protected] +91 22 6621 6305 Arun Agarwal Auto & Auto Ancillary [email protected] +91 22 6621 6143 Sumit Pokharna Oil and Gas [email protected] +91 22 6621 6313 K. Kathirvelu Production [email protected] +91 22 6621 6311 Teena Virmani Construction, Cement [email protected] +91 22 6621 6302 Ruchir Khare Capital Goods, Engineering [email protected] +91 22 6621 6448 Amit Agarwal Logistics, Transportation [email protected] +91 22 6621 6222 Amol Athawale [email protected] +91 20 6620 3350 Premshankar Ladha [email protected] +91 22 6621 6261 Rahul Sharma [email protected] +91 22 6621 6198 Malay Gandhi [email protected] +91 22 6621 6350 Technical Research Team Shrikant Chouhan [email protected] +91 22 6621 6360 Derivatives Research Team Sahaj Agrawal [email protected] +91 79 6607 2231 Prashanth Lalu [email protected] +91 22 6621 6110 Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. 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