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Bajaj Auto delivers in Sep quarter, but limited upside for stock

Bajaj Auto delivers in Sep quarter, but limited upside for stock
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First Published: Fri, Oct 21 2011. 01 04 AM IST

File photo of Bajaj Auto Ltd. plant at Chakan at the outskirts of Pune. Photo: Abhijit Bhatlekar/Mint.
File photo of Bajaj Auto Ltd. plant at Chakan at the outskirts of Pune. Photo: Abhijit Bhatlekar/Mint.
Updated: Fri, Oct 21 2011. 01 04 AM IST
Bajaj Auto Ltd has missed the Street profit estimate for the September quarter; however, that is unlikely to cause too much excitement among investors.
Operationally, things are stable. While domestic sales have slowed, expectedly, exports are chugging along at a decent pace. Yes, the stock slipped 1.3% on Thursday, but the BSE Auto index fared worse.
File photo of Bajaj Auto Ltd. plant at Chakan at the outskirts of Pune. Photo: Abhijit Bhatlekar/Mint.
Bajaj Auto’s net profit grew 6.4% from a year ago to Rs 725.80 crore. That’s less than the Rs 750-760 crore estimate of brokerages, but has been arrived at after deducting a notional forex loss of Rs 95 crore.
However, in the notes to the accounts, the company said this was a one-time loss and will be reversed over the contract period.
Bajaj Auto also reported robust operating margins of 20.1%. While that is a 59 basis points decline from a year ago, it’s still an improvement over the June quarter. One basis point is one-hundredth of a percentage point.
Clearly, there was a benefit from falling raw material prices, while the company also managed to rein in employee costs. Realizations improved 3.7% from a year ago as the company was able to sell a better mix of products and increase prices. The faster growth in export volumes, which have higher realizations, also helped.
Also See | Gaining ground (PDF)
That said, there are a couple of concerns for investors. One is the slow growth in domestic volumes—8% for two-wheelers, and a 9% decline in commercial vehicles. But the company has guided for new model launches in the second half of the year and for 20% growth this year.
Secondly, with the withdrawal of the DEPB (duty entitlement pass book scheme) benefits, there are fears that margins might suffer. That is a bit overdone.
The rupee is weakening. Bajaj Auto has increased prices for most models across export markets, though that could potentially impact volumes a bit.
The flip side is that with margins already at 20%, much higher than its peers, there is limited scope for this metric to increase further unless commodity prices fall drastically.
That also means that there is limited upside for the stock. Note, it is trading at 15.7 times its estimated earnings per share for fiscal 2012. That is higher than its average valuation.
PDF by Ahmed Raza Khan/Mint
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First Published: Fri, Oct 21 2011. 01 04 AM IST