Morning Insight 23 Jun 2014.pmd

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
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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
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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
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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
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