For the December quarter, Bajaj Auto Ltd posted a good 40.4% year-on-year (y-o-y) growth in net profit to Rs667.1 crore. Besides being 5% higher than Bloomberg consensus estimates, this has reduced risk to the fiscal 2011 profit estimates of around Rs2,600 crore. In nine months, the firm clocked a net profit of Rs1,939.3 crore, 55% higher than a year ago.
Strong 26.7% y-o-y growth in net sales to Rs4,177.1 crore in the December quarter was the driving force, led by 17% increase in volumes, and 8% increase in realization.
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Confidence in Bajaj Auto’s performance stems from its ability to minimize the pressure of rising input costs on its operating profit margin (OPM). The country’s second largest two-wheeler maker posted an OPM of 20.3%—170 basis points (bps) and 40 bps lower on a y-o-y and sequential basis, respectively. This was despite the 5% sequential dip in volumes. Raw material costs, too, had risen by 70 bps sequentially and 290 bps y-o-y. One basis point is one-hundredth of a percentage point.
In fact, the price hike of about 2% during the quarter only partially offset input cost pressures. Bajaj Auto’s prudent cost management, however, served to shore up OPM. Interestingly, managing director Rajiv Bajaj said in an interview that the worst cost increases seem to be done for fiscal 2011. This augurs well for both Bajaj Auto and the industry.
What reinforces investor confidence is the management commitment to its guidance of selling around four million vehicles during fiscal 2011. “With 2.9 million vehicles already sold in the first nine months, Bajaj Auto should be able to sell around a million vehicles in the last quarter,” says Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd. Robust sales will ensure operating leverage to contain costs.
One concern, however, is whether Bajaj Auto will be able to hike two-wheeler prices in the near term given the heightened competition in the market. While on an average it commands a market share of 32-33%, dealers reported a 5% month-on-month drop in December sales.
Rival and market leader Hero Honda Motors Ltd registered a 21% growth during the same period. Of course, Bajaj’s close to 70% share in the three-wheeler market—which enjoys higher profit margins compared with two-wheelers—would help shore up OPM.
For the December quarter, operating profit at Rs849 crore was 17% higher than a year before, though it contracted marginally on a sequential basis. Meanwhile, Bajaj Auto’s strong cash and bank balance of Rs3,821 crore is a positive.
Bajaj Auto’s strong performance was a shot in the arm for the scrip. It jumped nearly 2% to close at Rs1,319.85 apiece. This is after posting negative returns in the last three months and underperforming both the benchmark Sensex and the BSE Auto index of the Bombay Stock Exchange. Its current market price discounts the estimated fiscal 2012 earnings per share by around 12 times. Limited downsides for fiscal 2011 earnings target and a further 15-17% growth estimated in earnings between fiscal 2011 and 2013 offer sufficient upside for Bajaj Auto’s shares.
Graphic by Ahmed Raza Khan/Mint
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