Bajaj Auto Ltd staged a decent comeback in the September quarter, with volumes recovering after a prolonged period of decline. But concerns on profitability are still not behind it, given the challenges in the automobile market.

Domestic sales growth in the month of September after a 10-month decline was the highlight of the quarter. This may have partly been due to filling the inventory pipeline before the festive season and the post-GST (goods and services tax) shock. On the whole, the company’s 9% year-on-year growth in net revenue was impressive on the back of the 4% and 5% improvement in sales volume and realization, respectively.

Indeed, domestic motorcycle sales that comprises 58% of Bajaj Auto’s total revenue, revved up during the quarter, regaining lost market share. The uncertainty in the export markets cleared up after several quarters along with a breakthrough in new markets. One may recall that key markets like Nigeria and Kenya were reeling under the effects of a plummeting currency that lost the ability to import goods, following the oil crisis.

Meanwhile, commercial vehicle (three-wheeler) sales fared better as most states issued new permits. Since profitability in both three-wheelers and exports is higher than that in domestic two-wheeler sales, margins got a boost. Of course, the improvement in two-wheeler volumes helped as well.

Operating margin bounced back by 250 basis points from the June quarter lows to 19.7%. A basis point is one-hundredth of a percentage point. Yet, it is 170 basis points lower than the year-ago period. According to Bharat Gianani, an analyst with Sharekhan Ltd, “Higher raw material prices and the expiry of fiscal incentives in some regions led to the drop in profit margins compared to the year-ago period."

Can margins revert to the 23-25% levels by end-fiscal year 2018 (FY18) as the management said a few months ago? For now, it seems difficult given the multiple challenges before Bajaj Auto and the two-wheeler market as a whole. Higher commodity prices would weigh on profit margins for some more quarters. And that is not all. Competition in the two-wheeler market is getting more severe, with the plethora of variants and new launches by all contenders. Meanwhile, marketing expenses will remain high in order to cope with competition.

If at all, higher exports and three-wheeler sales could do the trick. “The hope is that the improvement in sales growth in these segments continues," says Gianani.

To be sure, Bajaj Auto’s stock is holding up solely on the hope that the steadily improving sales will offset the pressure on margins. At Rs3,257 apiece, the shares trade at 21 times estimated FY19 earnings, a rich valuation for a company estimated to grow earnings by 10-15% over the next 12-18 months.