Bajaj Auto: How much can domestic demand compensate for exports dip?

The main worry for investors is whether the aggression in introducing new models, and some of them lower priced ones at that, would erode margins


Bajaj Auto hopes to reap the full-year benefits of relatively fresh product introductions such as the Avenger in October and “V” in March.
Bajaj Auto hopes to reap the full-year benefits of relatively fresh product introductions such as the Avenger in October and “V” in March.

Bajaj Auto Ltd expects to ride to glory on the back of domestic motorcycle sales this year. An ebullient management has given a sales guidance of 4.6 million units in fiscal year 2017. Of this, 3 million units are supposed to be domestic sales, which translate into a hefty 40% growth. That will compensate for an expected 10% drop in export volume.

That’s a gung-ho forecast from a firm which saw its volume decline 2% in April and is absent from the fastest-growing scooters segment. In fairness, the company has also hinted at a slew of product launches in the coming months.

It also hopes to reap the full-year benefits of relatively fresh product introductions such as the Avenger in October and “V” in March. Bajaj Auto has also revived the economy segment in motorcycles with aggressively priced vehicles such as the CT100 and CT100-B in the past couple of years. Its entry into the cargo segment of commercial vehicles too should help boost volumes.

The main worry for investors is whether this aggression in introducing new models and some of them lower priced ones at that, would erode margins. So far, that hasn’t happened. In the March quarter, for instance, Ebitda (earnings before interest, taxes, depreciation and amortization) margin came in at 21.3%, expanding 3.6 percentage points from a year ago.

Bajaj Auto improved revenue per unit of sales and it was also able to reduce its materials costs-to-sales ratio. The latter might not be possible in the coming quarters as commodity prices start inching up. Another factor that would hit margins is the lower share of exports. With major export markets facing economic slump and currency weakening, it would be a surprise if exports perform ahead of the company’s guidance, even though the management says that the worst is over. In April, exports had fallen 36%.

That said, the management has guided for close to 20% Ebitda margin for the current fiscal year as well. An improving product mix with more sales from Avenger, Pulsar and “V” too should help.

A strong volume and margin guidance, and the fact that Bajaj Auto’s realizations went up (an indication of pricing power) were the key reasons why investors cheered up the stock 3.96% after earnings were announced. Net profit at Rs.803 crore was in line with forecasts.

While the stock trades at 17.6 times expected earnings per share for this year, after Wednesday’s guidance, earnings estimates are likely to be revised upwards.

The writer does not own shares in the above-mentioned companies.

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