Vehicle makers are facing rising input costs which could play spoilsport at a time when automobile sales are on the upswing. The impact has been limited so far but auto makers will feel the pressure to hike prices soon.
Two-wheeler firm Bajaj Auto Ltd’s December quarter results did see some effect on its raw material costs, but it capitalized on higher volumes and brought down costs to keep margins steady. Operating margins for Bajaj were higher at 22% in the December quarter, compared with 14.5% in the same period last year, but are flat compared with the September quarter.
Though margins may be flat, the sharp rise in its vehicle sales is driving performance for the two-wheeler maker. It sold 72% more motorcycles (710,000), while sequential growth was 19%. Three-wheeler sales were up by 25% and overall vehicle sales were up by 64%. Revenues were up by 57% to Rs3,296 crore and net profit nearly tripled to Rs475 crore. Its results were in line with consensus estimates, though sales fell a little short of expectations. The Pulsar and the Discover DTS-Si are driving sales growth and Bajaj Auto expects the Pulsar 135 LS launch to grow the Pulsar’s share of sales.
The low base effect of last year due to the economic slowdown and the firm’s decision to shift to selling high-end motorcycles, will keep year-on-year growth high for some time. The base effect will wear off in fiscal 2011 and as margins have turned flat, profit growth too will normalize. Fiscal 2010 saw the company incur a non-recurring cost of Rs180 crore due to a voluntary retirement scheme. Its absence will add to profits in fiscal 2011.
Still, analysts expect the company to post earnings per share of about Rs110 in fiscal 2010 followed by about Rs120 in fiscal 2011.
That’s a meagre growth in earnings and explains why the stock is trading at about 14 times its estimated 2011 earnings per share.
But a few things could change that: new product launches that add zing to sales growth, a downturn in the two-wheeler market which sees Bajaj Auto outperform its peers, or if it decides to return some of its growing cash surplus to shareholders. During the December quarter, it added Rs973 crore to take its cash balance up to Rs2,625 crore.
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