Bajaj Auto Ltd has shifted into the fast lane in September, ending a long ride in the slow lane. Motorcycle sales bounced back while its commercial vehicle (three-wheeler) segment revved up growth. This does signal an improvement in prospects, assuming sales growth sustains, but what is equally important is whether this can translate into higher profit margins.

Domestic motorcycle sales in September comprised 58% of total sales during the month, and rose by 7.3% over a year ago. This has come after 10 successive months of declining sales growth. Better still, Bajaj Auto has regained some lost share—rising from 18% a year ago to 20%—and the management is confident that it can increase further to 25% by end-fiscal year 2018 (FY18).

Exports for the month grew by a stronger 20.5% as clouds of gloom over its key markets such as Nigeria, Sri Lanka and Bangladesh cleared.

However, a surge in sales in one month is not enough to drive up its shares further. They closed 1.8% higher on Tuesday following the strong September numbers, but had earlier rallied 15% in a month on news of launches for the festive season, and the company’s entry into premium motorcycles in a tie-up with Triumph of the UK. Its current market price of Rs3,164 discounts FY19 estimated earnings by a rich 20 times, in anticipation of improved prospects.

What’s needed to sustain the current valuation is higher profitability. Note that weak sales and hefty discounts offered to customers to clear pre-GST stocks had led to a steep 270 basis points dip in operating margin for the June quarter. At 17.2%, it was way below its mean level of 20%.

The September quarter is unlikely to see a comeback in margins, given that domestic sales in July and August were lower. Further, a report by Nomura says that most two-wheeler companies including Bajaj Auto have been offering festive season discounts ranging from Rs1,000-3,000 per vehicle to boost sales. This may pull down realizations, which along with higher raw material prices could weigh on operating margins.

Fortunately, Bajaj Auto’s prospects in the commercial vehicles segment have improved. Three-wheeler sales that bring in higher margins compared to two-wheelers in domestic markets soared by 37% in September and 14% in the quarter. This could still lift overall profitability during the quarter.

The recovery in Bajaj Auto’s sales has been recognized by the Street. A report by Sharekhan says that the company’s prospects are brighter for the next two years compared to the 3% decline recorded on a CAGR (compound annual growth rate) basis between FY12 and FY17. That said, only sales growth is not enough. A comeback on the profitability front is important for its rich valuations to sustain.