Bajaj Auto’s margins shrink as sales dip and costs rise

Like most auto manufacturers in the last two quarters, Bajaj Auto was wedged between challenges due to demonetisation, emission compliance, and rising commodity prices


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Bajaj Auto Ltd may have scored brownie points on steadfast compliance with Bharat Stage (BS)-IV emission norms but its performance in the March quarter missed profit forecasts and disappointed investors.

Like the fate of most auto manufacturers in the last two quarters, Bajaj Auto was wedged between challenges in the market due to demonetisation and emission compliance and rising commodity prices. Sales therefore were about 10% lower year-on-year, as domestic demand contracted in addition to the already weak environment in international markets such as Nigeria, where scarce availability of US dollars has constrained imports.

Net revenue for the quarter declined by 8.6% to Rs4,896.4 crore although it met forecasts on the Street. What saved the day, shoring up revenue amid weak demand, was a better revenue-mix with higher proportion of premium motorcycles that nudged up realization per vehicle sold by 1.2%.

Yet, this was not sufficient to completely offset rising cost pressures. A 200 basis point jump in raw material costs as a percentage of sales coupled with increase in staff costs and other expenses adversely impacted profitability. A basis point is 0.01%.

So, operating margin for the quarter dropped by 200 basis points from the year-ago period to 18.5%, indeed a big letdown for investors as Bloomberg’s average estimate was 20.1%. In fact, for eight quarters, the company’s operating margin was consistently around 20% in spite of a fall in exports and challenges on sales.

“This time, higher commodity costs and lower share of three-wheelers dragged down profitability,” said Arun Agarwal, auto analyst at Kotak Securities Ltd.

As a result, the operating profit contracted by about 21% year-on-year and was a bit below the Street’s estimate. Consequently, net profit fell by 15% to Rs801.8 crore, disappointing investors.

Bajaj Auto’s shares fell by 1.9% on Thursday after the results were announced. The current market price of Rs2,974 discounts the one-year forward estimated earnings by about 19 times and factors in growth prospects too.

The company is gaining ground in domestic sales, with market share too inching up. But how price hikes pan out to improve realization and profitability during the current year will determine investor sentiment.

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