March quarter results of two-wheeler firm Bajaj Auto Ltd were in line with expectations. However, it established the firm’s strong operations and cost control, besides its hold over the premium motorcycle segment, which accounts for about three-fourths of sales.
A buoyant two-wheeler market through fiscal 2011 (FY11) saw all three listed entities—Bajaj Auto, Hero Honda Motors Ltd and TVS Motor Co. Ltd—post strong revenue growth. For the March quarter, Bajaj Auto’s net revenue grew by 23.5% year-on-year (y-o-y) on the back of better realizations and 17% volume growth. This lagged that of Hero Honda (31%) and the relatively smaller TVS Motor (34%) for the same period.
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But Bajaj Auto’s performance scored on profitability. Operating profit grew 11% y-o-y, while that of rival Hero Honda contracted by 10%. The firm was able to contain raw material cost increases better than peers. As a percentage of sales, this rose 150 basis points (bps) y-o-y compared with a 540 bps and 340 bps increase, respectively, for Hero Honda and TVS Motor.
This was due to its product mix, with premium motorcycles and commercial vehicles (three-wheelers), where profit margins are better than in the highly competitive motorcycle segment. Also, material costs and other expenses as a percentage of sales were marginally lower than in the preceding quarter. Hence, Bajaj Auto’s operating margin dipped by 240 basis points y-o-y, better than Hero Honda, where the margin contraction was around 520 bps.
What impressed the Street was Bajaj Auto’s 27% y-o-y jump in net profit for the quarter. In fact, through the year, the firm’s net profit gowth has surpassed its revenue growth—a sign of strong operations management. In comparison, Hero Honda’s net profit fell 16%.
However, Bajaj Auto’s reported net profit was Rs1,400 crore, as a result of Rs827 crore in gains realized from advance payment of a sales tax deferral loan. Robust profitability in domestic operations helped it write off around Rs100 crore due to impairment of investment in its Indonesian subsidiary. In comparison, TVS Motor is yet to announce its consolidated results, which analysts reckon might have similar adjustments that could adversely affect earnings.
Bajaj Auto’s management seems hopeful of 20% growth in volumes during the current year, though rising interest rates and product prices are headwinds for demand expansion. A key concern is the government’s intent to remove benefits offered for exports. Analysts estimate that this could drag earnings by 8-10%—a key reason why the company’s shares were jittery before results were announced.
The firm maintained its dividend of Rs40 per share on the enhanced equity following a 1:1 bonus issue. Its shares have outperformed both the auto index of the Bombay Stock Exchange and Hero Honda in the last 15 months. The stock’s current market price of Rs.1,287 discounts FY12 earnings by around 12 times. Besides, the stock is valued at a 20% discount to Hero Honda, which has several challenges in the near term after the severance with its Japanese partner. If the two-wheeler buoyancy is sustained, Bajaj shares should do better than its peers.
Graphic by Yogesh Kumar/Mint
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