Bajaj Auto Ltd failed to meet even watered-down estimates for the September quarter (Q2). In spite of a strong 25% year-on-year (y-o-y) growth in sales volume, analysts had toned down expectations after the firm announced aggressive price cuts to regain market share in entry-level motorcycles. True, its strategy is paying off. Sales channels look more energized, according to dealers, and the firm’s overall motorcycle market share also rose by about 200-300 basis points (bps). The quarter as a whole saw robust sales growth as two-wheeler sales jumped 25% and three-wheelers by about 39%.

Hundred basis points make up one percentage point.

But it wasn’t enough to enthuse investors. The Bajaj Auto stock tumbled by 4.3% after the Q2 results, reacting negatively to weak operating performance.

The 3% y-o-y drop in net realization on vehicles sold, as against expectations of flat realization, was the firm’s biggest failing. Price cuts and discounts on sales may be the reason, although the analysts’ call scheduled for Thursday may bring more insight.

The sharp rise in commodity costs exacerbated the problem. “Both pricing pressure to regain market share and higher raw material costs took a toll on margins," says Bharat Gianani, analyst at Sharekhan.

Ebitda (earnings before interest, tax, depreciation and amortization) margin therefore narrowed by a huge 290bps y-o-y, the highest fall among listed two-wheeler firms so far. Hero Motocorp Ltd, which declared results a week ago, posted a 220bps drop in Ebitda margin, while TVS Motor Co. Ltd too posted a marginal drop. Yet, for Bajaj Auto, strong exports against a depreciating rupee alleviated the domestic woes.

The strong sales growth trickled down to profit expansion. The 3.4% y-o-y growth in Ebitda was in-line with forecasts on the Street. Higher other income and a marginal drop in depreciation costs gave a leg up to net profit for the quarter.

That said, the unimpressive growth in realizations and pressure on profitability are dampeners for investors. Further, the mood for the festive season, which normally sees higher realizations, is sombre, given headwinds such as higher interest, fuel and insurance costs. All these are reasons for negative sentiment to weigh on the stock. Analysts may trim earnings forecasts due to margin pressure that is likely to continue for some more quarters.

The stock’s current market price of 2,475.30 discounts estimated FY2020 earnings per share by about 16 times, which is close to its long-term average, leaving little scope for appreciation.