Macquarie maintains 'underperform' rating on Bajaj Auto

CMP: Rs 1469

Macquarie maintain their Underperform rating on Bajaj Auto but increase the target price to Rs 1,225 from Rs 950 to reflect increased volumes and higher margin assumptions. While the demand outlook has improved and the company���s new bike has done well in the first couple of months, they do not think that Bajaj Auto will be able to increase its market share on a sustainable basis. Bajaj Auto reported 2Q FY3/10 results that were ahead of estimates by approximately 8%. Bajaj Auto recorded its highest ever operating margin of 22% for the quarter. The numbers were supported by better product mix (higher three wheelers, record exports and higher proportion of high margin bikes), lower material costs and positive impact of operating leverage.

Macquarie believe that the current quarter���s margin of 22% will be the peak for the company. Margins will likely come down mainly due to increasing raw material prices and as the proportion of new volume bikes increase in total sales. Bajaj Auto has contracted for approximately 60% of the steel requirements until December 2009. Thus, 40% of steel will be re-priced from October and margins will be affected by increases in prices of other key raw materials ��� eg, aluminium and tyres ��� from the coming quarter. However, some of this impact is likely to be offset by leveraging of fixed costs on the back of higher volumes.