Recommendation: Buy
Price target: Rs 2,550
Current market price: Rs 2,321
Key points
· Bajaj Auto Ltd (BAL) reported a 7% year-on-year (y-o-y) drop in the motorcycle sales for August 2007. The overall sales declined by 6% year on year (yoy) and grew by 5% month on month (mom) at 195,707 vehicles.
· BAL is launching its new bike Exceed on September 9, 2007 and has already begun its production at the Waluj plant. The company targets to sell 20,000 vehicles in September and about 50,000 vehicles by November 2007. The new vehicle should further fuel the growth in sales numbers in the festive season, beginning next month.
· The company plans to shut down its Akurdi plant from September 2007 and shift the production to its Waluj plant. The company manufactured only its scooter Krystal from this plant. With the production of the same being shifted to Waluj, the company hopes to save through sales tax benefits and other tax incentives.
· The Akrudi plant is spread over ~200 acres, and we estimate that it could add Rs 95 per share to the value of the company, in case the management decides to sell it off.
· The sales numbers for the company as well as the industry should improve going forward. Further, the improved product mix is likely to increase the operating margins for the company going forward. At the current market price of Rs 2,321, the stock trades at 19.3x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.4x.
· I have valued BAL on-sum-of-the- parts basis and am raising the price target for BAL to Rs 2,550 and am also upgrading my recommendation to a Buy.
