Market Outlook Expect market to open on a positive note on account of global cues. USDINR and 10-year G-Sec have fallen in the last couple of days. US markets gained marginally and most of the Asian markets are up by half to one percent. Finance Minister says that the government will reduce CAD and Fiscal deficit, and maintain growth. Brent crude has gained nearly 2% to $111/bbl. This week’s key event is the August F&O expiry and 1Q GDP growth. We initiate coverage of Bajaj Finance with a Buy rating and target price of INR1,520. Research Updates: BAJAJ FINANCE: Initiating Coverage - Bajaj Finance (BAF) has transformed from a captive two- wheeler financier to a diversified lender (Consumer, SME, Commercial), and is now building scale with profitability. Well-entrenched business model comprises businesses that are either profit maximizers (generate RoA of over 5%) or scale builders (generate RoA of over 2.5%). Diversification of product portfolio de-risks growth/earnings profile and mitigates the risk arising from a particular segment or any adverse regulatory clampdown. In the last three years, BAF has outpaced its peer group in growth and earnings; we expect the strong business momentum to continue. Improvement in risk management has led to historic low GNPA/NNPA at 1.1%/0.2%, despite a challenging macro environment and operations in high-risk segments. We initiate coverage with a Buy rating and target price of INR1,520 (1.6x FY15E BV of INR949). INDIA TELECOM: Accommodative policy action - next source of optimism - Spectrum market value estimated at INR45-75b vs INR120b current benchmark - TRAI recommendations on spectrum pricing expected – indications of an accommodative stance: TRAI is currently holding a consultation process on valuation of spectrum and is likely to make its recommendations by September 2013. For the auction to be successful, we would expect at least 50% decline from the current reserve price of ~INR120b. Company Description Bajaj Auto Limited manufactures and distributes motorized two-wheeled and three-wheeled scooters, motorcycles and mopeds. Key investment arguments Operating performance above estimates on favorable Fx, which against expectation has been retained: Bajaj Auto¡¦s (BJAUT) 1QFY14 operating performance was above estimate, with adj. EBITDA margin of 20.4% (v/s est. 18.4%), driven by benefit of favorable Fx, which has been retained. Management commentary on result and outlook: 1) 70% of balance FY14 exports hedged between INR55-66 band, 2) Fx benefit over INR54/USD to be retained, 3) current domestic demand outlook remains weak; however, with good monsoons, expects demand to improve during 2H, 4) launch of six new Discover motorcycle to help the revival in domestic motorcycle sales, 5) export market seems to be stabilizing, expects recovery on a sequential basis, 6) outlook on 3Ws positive, with issuance of permits and launch of new range of vehicles and stabilization of export markets and 7) weakness in INR to continue to drive margins.. Valuation and view Factoring near term headwinds, we cut volume estimates. However, we raise margin estimates reflecting favorable Fx hedges for FY13/FY14 and our house view on INR/USD. While valuations are reasonable, demand recovery along with stability in competitive intensity would be the key driver for the stock’s performance. Maintain Buy with a target price of INR2,229.
Posted on: Mon, 26 Aug 2013 03:59:13 +0000
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