Worst is behind Bajaj Auto as it deftly navigates tough conditions

Bajaj Auto’s 9% drop in net revenue to Rs5,066.9 crore when compared to a year back was not as bad as analysts had estimated


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

Bajaj Auto Ltd’s December quarter performance sprang a positive surprise. At a time when analysts had pencilled in subdued results after factoring in the drop in sales on account of demonetization, the two- and three-wheeler manufacturer beat forecasts on all fronts.

In fact, the steep 10.5% drop in sales, with three-wheeler sales falling by 17% after demonetization, had already toned down investor expectations for the quarter.

However, the 9% drop in net revenue to Rs5,066.9 crore when compared to a year back was not as bad as analysts had estimated. Perhaps new launches and Bajaj Auto’s focus on profitability churned out a 1.4% expansion in average realization, which minimized the impact of the drop in sales on account of the currency shortage.

Besides, there were other odds too. The company’s exports have been contracting for many quarters, mainly because three-wheeler exports to emerging nations like Egypt, Nigeria and Iran have been hit hard due to plunging crude oil prices and the sharp devaluation of the currencies in these nations against the US dollar.

But Bajaj Auto’s efficient cost management was commendable. Costs of raw material, staff and marketing were maintained as a percentage to sales, in spite of weak volumes and operating leverage. The company’s operating margin came in at 20.6%, about 80 basis points higher than Bloomberg’s average estimate. A basis point is one-hundredth of a percentage point.

Operating profit, which fell by 10.9% from the year-ago period to Rs1,043.9 crore, was also higher than what the Street expected.

Finally, the strong beat in operating performance on the back of better realization and cost control shored up net profit by 2.6% to Rs924.6 crore. Little wonder that Bajaj Auto’s stock rose marginally when the broader indices were jittery in the pre-budget trading session.

The company’s shares took a beating for many quarters when exports skidded as oil prices plummeted. However, this has been factored into its current market price of Rs2,837.75 per share, which is about 18 times the estimated fiscal year 2018 earnings per share. At this level, downsides to the stock are few, given that it has new launches and variants in its basket, the worst of demonetization is behind it, and exports could get better as oil prices improve.

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