Bajaj Auto Ltd’s unexpected 67% gain in its net profit for the June quarter can be attributed mainly to two reasons. One, greater realization from export sales thanks to the depreciation in the rupee and two, savings in raw material costs because of the drop in commodity prices. While the street was already anticipating that Bajaj would benefit because of these two factors, the extent of the gain was higher than most analysts’ estimates.
These gains have more than offset the dip in overall volumes. Bajaj has been one of the worst hit by the slowdown in vehicle financing. The company has not been able to take advantage of the revival in domestic demand that is being pushed by the government’s fiscal stimulus package. While the two-wheeler industry grew some 8% during the quarter, Bajaj’s volumes shrank by around 12%.
However, net sales increased 1.6% as the company sold higher engine capacity motorcycles such as the Pulsar and the XCD, and three-wheeler sales grew 8.7%.
Typically, these vehicles have higher realization per unit. Average realization per vehicle rose by 15% on a year-on-year (y-o-y) basis.
Export sales, which make up a third of overall numbers, too declined. But the company made more money per unit because of the sharp depreciation in the rupee on a y-o-y basis.
On the expenditure side, there was a Rs200 crore saving in raw material expenses year-on-year as the full benefits of the softening of key commodities such as aluminium, steel and rubber were realized this quarter.
As a result, operating profit rose 71% to Rs455 crore. Operating margin increased by a massive 800 basis points to 19.5%.
The 19.5% margin, however, is unlikely to be sustained, as the commodity price cycle has started moving north again. Despite this, the outlook is bright for Bajaj Auto. Most analysts have a buy rating on the stock as they figure it will improve its sales with the recent upgrades and a new product that will hit the showrooms shortly. At current price levels of Rs1,150 a share, it is trading at about 13 times the estimated earnings for the fiscal compared with a 16 times price-earnings multiple for peer Hero Honda Motors Ltd. Investors bid up the price by 5.3% on Thursday after the better-than-forecasted results were announced.
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