Bajaj Auto stock takes a hit

Concerns on the outlook for BajajAuto Ltd seem to be increasing. Shares of the second largest two-wheeler maker that have skidded since the announcement of December sales figures also mirror this concern. The month’s aggregate sales were not only 12% lower than the Street’s expectation, but also 21% lower than the 10-month average during the fiscal year.

The weakening trend in domestic motorcycle sales has been visible in the last few quarters. From a 10.1% year-on-year (y-o-y) growth in the June quarter, it fell to 8.2% in September and further to 6.3% in December. According to a Brics Securities Ltd report, “High fuel cost has driven business towards non-premium (entry and executive) motorcycles in the last four to five months, since they are more fuel efficient.” Further, sales of premium bikes, which are more popular in urban areas and bought through loans, are bound to be hit by higher interest rates. The worry stems from the fact that a little over half of Bajaj’s total sales comprise the premium segment (higher than 125cc).

Heightened competition expected in two-wheelers is also fuelling concerns. A similar trend witnessed last year in the passenger vehicle segment moderated growth. Most two-wheeler makers have lined up a battery of new launches. TVS Motor Co. Ltd said in a media release on Monday that it would launch four two-wheelers in 2012. Honda Motorcycle and Scooter India Pvt. Ltd stated at the Auto Expo that it intends increasing its two-wheeler market share in India from the current 13% to 30% by 2015.

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Bajaj is bound to feel the heat in terms of volumes and product pricing, as most new models by peers are being positioned in the premium and executive segment of bikes and scooters, both of which have been its strongholds. That said, Bajaj’s high 29% y-o-y growth in exports (December quarter) will help it hold on to revenue and profitability. “Better export realization due to price hikes taken and the rupee depreciation will arrest drop in profitability,” said Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd. Bajaj’s management, in the analysts’ call following the September quarter results, maintained its guidance for fiscal 2012 of selling 4.5 million vehicles. Some analysts feel that it may fall a tad short of this.

What could aid valuations, however, is that Bajaj enjoys the highest operating profit margins (around 20%) in the industry, thanks to its favourable product mix, which includes three-wheelers. Margins during this quarter and the next may also be shored up by favourable exchange rates on exports.

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