After a sharp decline last fiscal, expect margins to reverse trend and increase
140bps over FY07-10 to 13.2%, driven by (1) control over selling expenses, (2) operating leverage on improved volumes, and (3) shift in sales mix to pricier bikes. We believe this would surprise consensus, leading to forecast upgrades.Bajaj Auto may not be able to compete directly with Hero Honda in the premium bike segments.
Upgrading Hero Honda to Buy from Neutral, driven by (1) sharp revision of EPS forecasts, 4.5% in FY08, 11.7% in FY09 and 12.4% in FY10, and (2) attractive valuations. Target price of Rs 880 is based on 8.5x estimated 1-year forward EV/EBITDA, a 10% growth premium to existing multiples.