Investor's Eye: Update - Bajaj Auto; Viewpoint - Marico Kaya Enterprise

 

Investor's Eye [November 26, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Bajaj Auto Recommendation: Hold Price target: Rs2,625 Current market price: Rs2,617   Nigerian shock to exports, maintain Hold with revised price target of Rs2,625   Key points  Nigeria, a key export market for Bajaj Auto (Bajaj), has devalued its currency by 8.4%. The value of its currency, niara (N), has now been pegged at N168 to the US Dollar (USD) as compared with N155 earlier, and the benchmark interest rate increased by 100 basis points (BPS) to a record 13%. The measures taken by Nigeria, Africa's largest oil producing nation, are in response to a 30% fall in crude oil prices to below USD80 per barrel. The currency devaluation would be inflationary and affect consumer demand in Nigeria and the Indian companies that export to the African country. Nigeria is one of the largest export markets for Bajaj. In FY2014, the company sold 450,000 motorcycles in the African country and is the market leader there with nearly a 40% share. In addition, the company has a similar market share in the three-wheeler segment too. To compensate for the devaluation of the niara, Bajaj's management is expected to raise product prices and part of the burden would be borne by the company and its dealers in Nigeria. Thus, there would be a negative impact on the sales in volume terms (a 20% growth was seen in the sales volume last year) and the margins of the Nigerian operations. To factor in the development, we have reduced our FY2016 volume estimate for Bajaj by 2.3% and our earnings estimates for FY2016 and FY2017 by 2.7% and 1.8% respectively. But the price target has been revised upwards to Rs2,625 because we have rolled forward the valuation to the FY2017 estimates in this note. The price target is based on 15.5x FY2017E earnings and values Bajaj's 47.9% stake in premium motorcycle manufacturer, KTM AG, at Rs130 per share (a 30% discount to the current market price). We continue to prefer Hero MotoCorp in the two-wheeler space and retain our Hold recommendation on Bajaj for the long-term investors.   VIEWPOINT       Marico Kaya Enterprise Current market price: Rs876     Factors positives adequately; Book profit with an overall gain of 80% in three months    Key points Our investment thesis on Marico Kaya rested on the fact that the company is a high operating leverage play and likely to witness a robust growth in margins and earnings. The same has started to play out as was apparent from its Q2FY2015 earnings performance. In Q2FY2015, with a 15% growth in the top line, the operating profit grew manifold from Rs0.3 crore in Q2FY2014 to Rs11.1 crore in Q2FY2015 while the net operating earnings saw an over four-fold jump from Rs2.3 crore in Q2FY2014 to Rs12.3 crore in Q2FY2015. Besides, despite the capital-intensive nature of its business the company is very well capitalised and enjoys a debt-free status with surplus cash of about Rs170 crore in its books.  Of late the market has been taking cognisance of these factors and the stock has hugely outperformed the market, appreciating by 80% in the last three months (we had initiated a positive view on the company through our Viewpoint note dated August 25, 2014). After the recent run-up in the stock, Marico Kaya is ruling at around 39x and 31x FY2016 and FY2017 rough earnings estimates respectively. We believe that given the slow recovery in the consumer discretionary space and the premium valuation of the stock, Marico Kaya factors in all the near-term positives (like a strong balance sheet, a stabilised business) and offers a limited upside from the current levels. We, therefore, advise our investors to Book profit in the stock with an overall gain of 80%. Click here to read report: Investor's Eye      Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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