Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,380
Current market price: Rs1,873
Free-wheeling on auto and insurance
Key points
- The growing affordability of two-wheelers due to the rising per capita income of Indians as well as the low cost and easy means of obtaining finances have resulted in a high double-digit growth in two-wheeler sales over the last four years.
- A stronger demand from the rural areas owing to a good monsoon and the resulting good kharif and rabi crops would further boost the underlying growth trend mentioned above.
w With its recently launched two-wheeler models Bajaj Auto Ltd (BAL) is best placed to meet the growing demand for two-wheelers. We expect its revenues to grow at a compounded growth rate (CAGR) of 21.6% over FY2005-07E. - The gaining acceptance of the higher-end models and the softening of the raw material prices are expected to expand BAL's operating profit margin by 60 basis points, leading to a compounded annual growth of 25% in its operating profit over FY2005-07E.
- Bajaj Allianz Life Insurance (BALI), BAL's life insurance subsidiary, is the largest private sector insurance company in India and should add significantly to BAL's value. We estimate the value of BALI to be Rs482 per share of BAL.
- At the current market price of Rs1,873, the stock is quoting at 9.7x its FY2007E core earnings per share (EPS) and 10.0x its FY2007E EV/EBIDTA. Taking into account BALI's value (Rs482 per share) and that of its investments (Rs615 per share) we recommend a Buy on BAL with a price target of Rs2,380 based on the sum-of-parts valuation method.