* An unexpectedly sharp dip in exports led to underperformance:

The stock of Bajaj Auto (Bajaj) has suffered due to a sharp slowdown in the companys export volumes lately and a political turmoil in its key overseas markets such as Sri Lanka and Nigeria. For Bajaj, exports contribute around 45% of the total volume sales and two consecutive months of weak export volumes (a 20% drop in February 2015) would severely affect its financial performance in Q4FY2015. However, a lot of negatives are already factored in the stock price, which has corrected by around 17-18% and grossly underperformed the market.

* Exports to normalise in a few months:

We expect the exports to Nigeria to normalise after the general election in the country which are now scheduled for this March end as against the previous schedule of mid February. The change of government in Sri Lanka led to a freeze on an order for 1.25 lakh Discover motorcycles; the management expects the order to be back on track in due course. With a market share of 80% and 43% in Sri Lanka and Nigeria respectively, Bajaj is the leader in these markets and an improvement there would help boost its export volumes.

* New launches to aid growth in domestic market:

Efforts are being made to regain the lost market share in the domestic motorcycle segment also. The company has just launched the new Platina (with an engine upgrade). It is expected to launch the new generation of Pulsar and a new commuter segment motorcycle over the next few months to shore up the volumes. Additionally, the Supreme Court has clubbed all pending litigations at various High Courts against the introduction of quadricycles and transferred the same to itself at the behest of the government. A favourable decision from the court in this regard would pave the way for the introduction of Bajajs RE60 giving the company a first mover advantage.

* Correction offers an opportunity:

Bajaj maintains strong margins and a depreciation of the rupee against the dollar would boost its profitability. The recent fall in the stock leaves room for a healthy upside. Hence, we upgrade the stock to a Buy from Hold with a revised price target of Rs2,400. We value the core business at 9.5x FY2017E EBITDA and the 47.9% stake in the premium motorcycle manufacturer, KTM AG, at Rs120 per share (a 30% discount to the current market price).

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