Dear Investor,
The markets this month ended extremely weak with the Sensex closing at 16,675, down 8.40% and Nifty closing at 5,000, down 8.8% for the month. If it had not been the last 2 days 5% dash, the markets would have ended 13% lower.
Q2FY12 results season came to an end and the takeaways from this quarter are more negative than positive. An intense showdown between the healthy topline and broad based margin compression has been the hallmark of this quarter’s results. Sectors that sprung a surprise on the downside include cap goods, telecom, utilities and real estate.
The earnings trajectory has decisively softened during the earnings season. We have also knocked down our earnings estimates in the range of 4%-5% for the Sensex and are EPS estimates currently are at INR 1,155 and INR 1,378 for FY12 and FY13, respectively. In the Sensex universe, downgrades were observed in 20 out of 30 stocks during the earnings season. However, as the macro environment gets murkier, further cuts to earnings estimates, especially for FY13, cannot be ruled out.
So amongst all these, what should your strategy be for September? What stocks should you look to buy?
To get answers to all these questions, Click here to read our Monthly Strategy - September, 2011 report.
Also, click here for September's Best Buy and click here for September's Technical Top Pick.
The markets this month ended extremely weak with the Sensex closing at 16,675, down 8.40% and Nifty closing at 5,000, down 8.8% for the month. If it had not been the last 2 days 5% dash, the markets would have ended 13% lower.
Q2FY12 results season came to an end and the takeaways from this quarter are more negative than positive. An intense showdown between the healthy topline and broad based margin compression has been the hallmark of this quarter’s results. Sectors that sprung a surprise on the downside include cap goods, telecom, utilities and real estate.
The earnings trajectory has decisively softened during the earnings season. We have also knocked down our earnings estimates in the range of 4%-5% for the Sensex and are EPS estimates currently are at INR 1,155 and INR 1,378 for FY12 and FY13, respectively. In the Sensex universe, downgrades were observed in 20 out of 30 stocks during the earnings season. However, as the macro environment gets murkier, further cuts to earnings estimates, especially for FY13, cannot be ruled out.
So amongst all these, what should your strategy be for September? What stocks should you look to buy?
To get answers to all these questions, Click here to read our Monthly Strategy - September, 2011 report.
Also, click here for September's Best Buy and click here for September's Technical Top Pick.
Bajaj Auto is the second largest two-wheeler manufacturer in India with a domestic market share of 28%. It offers products in all motorcycle segments— Platina (entry), Discover (executive) and Pulsar (premium). It is also the largest three-wheeler manufacturer in India. Post the demerger in May 2008, BAJAUT has been solely focused on the automobile business. In the past few years, the company has shown strong growth in exports that now forms nearly 35% of its total volumes.
Investment Rationale
Two-wheeler penetration in India is currently low compared with comparable countries. In the coming years, penetration is expected to rise driven by growing disposable incomes, favorable demographics, better availability and penetration of financing, and increasing availability of product choices. With BAJAUT being the second largest two-wheeler manufacturer in India it is likely to benefit significantly from the same.
BAJAUT is likely to gain market share in the domestic market driven by new launches namely, Discover 125cc and to be launched Boxer. Three wheeler demand continues to outstrip supply and demand is also picking up in the exports market. BAJAUT’s portfolio has been further diversified with increasing contribution from exports where the company has pricing power. These factors have made earnings outlook favorable for the company.
We recently met the management of Bajaj Auto and the management has maintained volume growth guidance at 20% Y-o-Y for the current year at 4.6mn units largely due to (1) launches of Boxer 150cc and new Pulsar variants in Q2, (2) freeing up of permits for three wheelers in Karnataka and (3) strong traction in exports.
As per the company, the pressure from input costs has started to ease off hence benefits should accrue from H2FY12. BAJAUT was scheduled to be effecting selective price hikes on Pulsar and in the exports market in August. The product mix should improve with a pickup in demand for three wheelers and the Pulsar while the ramp up in production at tax free Pantnagar plant should result in a drop in effective tax rates by 1% for FY12. These factors should lead to a step up in EBITDA margins from the lows of 19.1% in Q1FY12.
Valuations
Robust demand visibility and margin levers make the company’s outlook favorable while we consider the launch of Boxer 150cc acts as a positive catalyst for the stock.
Currently, the stock is available at 14.51x and 12.1x (10.6x excluding cash) consolidated P/E on FY12E and FY13E, respectively.
We believe valuations are attractive and hence recommend a 'Buy' with a target price of Rs. 1731, a 10% upside.
Investment Rationale
Two-wheeler penetration in India is currently low compared with comparable countries. In the coming years, penetration is expected to rise driven by growing disposable incomes, favorable demographics, better availability and penetration of financing, and increasing availability of product choices. With BAJAUT being the second largest two-wheeler manufacturer in India it is likely to benefit significantly from the same.
BAJAUT is likely to gain market share in the domestic market driven by new launches namely, Discover 125cc and to be launched Boxer. Three wheeler demand continues to outstrip supply and demand is also picking up in the exports market. BAJAUT’s portfolio has been further diversified with increasing contribution from exports where the company has pricing power. These factors have made earnings outlook favorable for the company.
We recently met the management of Bajaj Auto and the management has maintained volume growth guidance at 20% Y-o-Y for the current year at 4.6mn units largely due to (1) launches of Boxer 150cc and new Pulsar variants in Q2, (2) freeing up of permits for three wheelers in Karnataka and (3) strong traction in exports.
As per the company, the pressure from input costs has started to ease off hence benefits should accrue from H2FY12. BAJAUT was scheduled to be effecting selective price hikes on Pulsar and in the exports market in August. The product mix should improve with a pickup in demand for three wheelers and the Pulsar while the ramp up in production at tax free Pantnagar plant should result in a drop in effective tax rates by 1% for FY12. These factors should lead to a step up in EBITDA margins from the lows of 19.1% in Q1FY12.
Valuations
Robust demand visibility and margin levers make the company’s outlook favorable while we consider the launch of Boxer 150cc acts as a positive catalyst for the stock.
Currently, the stock is available at 14.51x and 12.1x (10.6x excluding cash) consolidated P/E on FY12E and FY13E, respectively.
We believe valuations are attractive and hence recommend a 'Buy' with a target price of Rs. 1731, a 10% upside.
