Graphic: Mint
Graphic: Mint

Bajaj Auto’s dismal Q1 results builds a case for FY2019 earnings cut

Bajaj Auto's strategy to push its entry-level motorcycles and perhaps dole out higher dealer incentives translated into lower-than-expected realization on sales

Bajaj Auto Ltd’s feeble performance in the April to June (Q1) quarter has shocked the Street. As revenue, profit and margins missed Bloomberg estimates, Bajaj Auto stock plunged 8.7% on Friday. What are the key takeaways from this weak quarter?

Undoubtedly, the two-wheeler and commercial vehicle maker is facing the heat of competition.

At a time when costs are rising and most automakers across segments took price hikes, Bajaj Auto cut prices sharply on some vehicles. Its strategy to push its entry-level motorcycles and perhaps dole out higher dealer incentives translated into lower-than-expected realization on sales. The 1.3% decline in average realization did not go down well with investors, given expectations of a 6% year-on-year (y-o-y) increase.

To be sure, the firm’s domestic motorcycle market share inched by about 100-150 basis points (bps) to 16.3% when compared to the year-ago period. Share in the entry-level segment rose by a higher 850bps to 33.7%. On the whole, the quarter’s sales volume jumped by 38% yoy.

But the trade-off was profitability. Ebitda (Earnings before interest, tax, depreciation and amortization) margin of 17.3% was 220bps below the estimate on the Street, although in line with the year-before period.

Another takeaway is that the export realizations were weaker-than-expected, which is surprising given the scenario of a depreciated rupee and the highest-ever quarterly exports. Explaining the disappointing performance, Bharat Gianani, an analyst at Emkay Global Financial Services says, “adverse product mix, pricing pressures due to intense competition and lower than anticipated gain on USD/INR realisation led to margin miss."

The question is whether this quarter’s performance is a temporary blip. The analysts’ call on Monday may bring greater clarity. However, analysts reckon that this may be a strategy by the firm to garner more market share through a rural push as well. After all, from FY2010-FY2018, Bajaj Auto’s Ebitda margin had narrowed from 24.3% to 15.7%.

One can only hope that this strategy plays out in its favour over the longer term. The stock, which had just started its upward rally after strong sales numbers since April, nosedived on the results. At 2,841, it trades at 17 times estimated earnings for FY2019. However, downside risks continue as weak realisations, rising costs and margin pressure make a strong case for a cut in earnings estimates.

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