The March quarter (Q4) earnings bring good tidings for Bajaj Auto Ltd’s investors. Particularly noteworthy is the ramp-up in three-wheeler and commercial vehicle (CV) sales. Maharashtra’s move to open up three-wheeler permits aided Bajaj Auto’s sales in the segment—they rose a huge 144% year-on-year. Further, segment exports rose 83% on the back of improving conditions in Egypt and forays in new markets. The depreciating rupee gave a leg-up to revenue during the quarter.

Likewise, the going was good for motorcycle exports, which grew by 25% year-on-year outperforming domestic sales growth of 20% year-on-year. In its media release, the firm explained that a strong recovery in Nigeria, focus on the sports segment in Latin America, and new launches in the Philippines and Malaysia drove export volumes.

According to some analysts, Bajaj Auto’s efforts to plug key gaps in its product portfolio and take pricing action where necessary paid rich returns. Net revenue growth of 38.3% from a year ago beat Bloomberg analysts’ forecast. Rising exports and a depreciating rupee shored up average realizations for the quarter, which was 4% higher year-on-year.

In spite of this, the pressure from rising raw material costs is evident from the decline in gross margins. As a percentage of sales, it rose by about 150 basis points. However, lower “other expenses" offset this. Hence operating margin at 19.4% was 90 basis points higher than the year-ago period and was also in-line with estimates, maintaining the run rate of margins above 19% for the last three quarters.

With costs reined in, high revenue growth trickled down to a 45% growth in operating profit at Rs1,315 crore that also beat the Street’s forecasts of Rs1,297 crore. Investors must note that Bajaj Auto has had a steady stream of “other income" through prudent investments. The 25% year-on-year jump in “other income" shored up the standalone net profit, which at Rs1,080 crore was slightly higher than what 27 brokerage firms with Bloomberg had pencilled in.

What’s the issue then? Why is the stock lagging its peers?

While Bajaj Auto’s performance ticked all the boxes on the scorecard for the quarter, its showing in the domestic motorcycle market is worrisome. Lack of scooters in its product portfolio has dragged performance for a couple of years. Motorcycle growth has fallen prey to competition. FY18 motorcycle sales grew by a minuscule 5% compared to a roaring 14% and 22% at the top two producers Hero MotoCorp Ltd and Honda Motorcycle and Scooter India Pvt. Ltd, respectively. According to Bharat Gianani, an analyst at Sharekhan Ltd, “While the export volume outlook remains strong, Bajaj faces intense competition in the domestic market which will lead to continued market share erosion for the company."

Given this scenario, the underperformance of Bajaj Auto’s stock to benchmark indices and to the competition is not surprising. Certainly, the CV segment and exports have led the company out of the woods, but it needs to prove its mettle for valuations to stretch from the current level of 16 times one-year forward estimated earnings.

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