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Bajaj Auto: rich valuations outweigh stable performance

Stiff competition seen in the motorcycle segment also a concern
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First Published: Wed, Jan 16 2013. 06 17 PM IST
According to the management, the company will be able to maintain operating margins as its market share in motorcycles improves. Photo: HT
According to the management, the company will be able to maintain operating margins as its market share in motorcycles improves. Photo: HT
Updated: Wed, Jan 16 2013. 10 13 PM IST
Bajaj Auto Ltd’s December quarter performance, which was in line with analysts’ expectations, didn’t help the stock. Its shares shed 2% in Wednesday trade to close at Rs.2,073 each, as concerns over the rich valuation and stiff competition seen in the motorcycle segment took away the shine of the better-than-industry growth rate posted by the firm.
New products helped Bajaj Auto partly offset the slowdown. A key positive was the 3.7% expansion in average realization per vehicle compared with a year before, driven by a better product mix and higher export revenue. In its media release, the company stated that the December quarter’s domestic growth rate of 7% in motorcycles and 23% in three-wheelers surpassed that of the industry, which grew at 4% and 14%, respectively, in the two segments.
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A favourable exchange rate and improved exports, mainly to African markets, helped. Net revenue of Rs.5,412.7 crore rose 8.6% from the year-ago period and 8.9% from the preceding quarter. However, raw material costs as a percentage of sales rose by around 80 basis points from a year before, reflecting in the 4.9% increase in raw material cost incurred per vehicle.
A basis point is one-hundredth of a percentage point.
Operating margin at 20.1% was down marginally from a year back. Reported operating profit at Rs.1,105.4 crore was 4.1% higher and better than Bloomberg’s consensus estimates.
Tax benefits at its Pantnagar plant expired during the first quarter of the year. Net profit, when adjusted for extraordinary income in the year-ago period, was marginally lower at Rs.818.7 crore, in line with broad market expectations.
Given the slowdown in the market, Bajaj Auto has managed to sustain growth in revenue and profitability. The management said that it would be able to maintain operating margins as its market share in motorcycles improves.
However, a report by Prabhudas Lilladher Pvt. Ltd said that a 750 basis points erosion in market share between April and November 2012 in the 125-150cc segment, with stiff competition from Honda and Yamaha, may stymie growth in the domestic motorcycle segment. Bajaj Auto is likely to clock total sales of around 4.3 million vehicles in fiscal 2013, lower than the 5 million seen at the beginning of the year.
True, analysts envisage a better outlook for two-wheelers in fiscal 2014. Yet, the current market price discounts one-year forward earnings by around 17 times, which is stretched considering a stable growth rate of 12-14% in profit estimated over the next 12-18 months.
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First Published: Wed, Jan 16 2013. 06 17 PM IST
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