Dull show by Bajaj Auto as exports go downhill

With operating performance being mediocre, the moot question is how will the margins pan out in future, especially given the increase in raw material costs


If motorcycle exports at Bajaj Auto fell by 17% year-on-year, that of commercial vehicles fell harder by 48%. Photo: Abhijit Bhatlekar/Mint
If motorcycle exports at Bajaj Auto fell by 17% year-on-year, that of commercial vehicles fell harder by 48%. Photo: Abhijit Bhatlekar/Mint

Bajaj Auto Ltd’s performance in the June quarter was lacklustre and, therefore, worrisome for investors.

Flat sales growth, mainly because of plummeting exports across product categories, is likely to cap profitability.

Net revenue got a leg up from higher realization in spite of a year-on-year drop in sales volume. It rose by 2.6% from a year ago to Rs.5,747.9 crore, falling short of the 27-broker Bloomberg consensus.

Also see: Bajaj Auto Q1 profit rises 2% to Rs978 crore

Domestic sales expanded by about 16%, but this was not enough to offset the weakness in the overseas markets.

If motorcycle exports fell by 17% year-on-year, that of commercial vehicles fell harder by 48%.

Analysts explain that domestic prices of the premium sports category helped push up net average realization during the quarter.

In its media release, the firm stated that markets such as Nigeria and Egypt continue to remain weak due to the depreciation of the local currency and the paucity of foreign exchange following the oil crisis.

While this is not new, it weighs on Bajaj Auto’s profits, given that exports comprise nearly 38% of sales volume.

Therefore, the tepid 2.2% growth in operating profit, too, is not surprising.

Like net sales, this, too, fell short of the Street’s forecast. Adjusting for excise duty accounting under the new Indian Accounting Standard, the firm’s operating margin was 20.5%, a tad lower than the year-ago period.

That’s not all. Lower “other income” compared with a year back reduced net profit growth to a mere 2.2% at Rs.978.4 crore.

The Street was not enthused by the weak results. And, given the dull trading day, Bajaj Auto’s stock, too, closed a tad lower at Rs.2,668.8, which discounts the one-year forward estimated earnings by about 18 times.

With operating performance being mediocre, the moot question is how will the margins pan out in future, especially given the increase in raw material costs.

Further, the export situation is unlikely to improve soon. Competition on the home ground is increasing, as is mirrored in the firm’s market share in motorcycles, which has barely improved.

Tepid growth in sales volume and an adverse product mix pose a risk to operating leverage and profit margins.

Given these challenges, the stock’s valuation is unlikely to improve in the near term.

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