Bajaj Auto’s higher realizations need to sustain to maintain investor interest
- Management says that it had raised product prices in July, September. Besides, export realizations have also been better
- Bajaj Auto improved its operations in what can be seen as a lacklustre quarter
Bajaj Auto Ltd appears to be cruising despite the winds of change in the auto sector. The second quarter performance was much ahead of the Street’s estimates. Immediately after the results, the company’s stock perked up 3.7% on Wednesday, eventually ending about 1.3% higher at close of the day’s trade.
As it turns out, Bajaj Auto improved its operations in what can be seen as a lacklustre quarter. Besides, a benign cost environment and lower tax rates resulted in an improvement in its profit. Net profit surged 21.7% to ₹1,402 crore in Q2 FY20, compared to the year-ago quarter, on a stand-alone basis.
This came in sharply higher than Bloomberg’s consensus expectations of about ₹1,153 crore, which is what the Street liked. One reason for this spike was the company’s decision to opt for the lower corporate tax rate, which the management clarified during a conference call after the results.
Overall revenue, though, was lower, which mirrors the slowdown in the two- and three-wheeler space. Revenue dipped about 4% in Q2 year-on-year. However, it was ahead of the Street’s expectations by about ₹300 crore. This was so because Bajaj Auto has managed to improve realizations even on lower volumes.
The product mix has been marginally in favour of three-wheelers. Additionally, the management said that it had raised product prices in July and September. Besides, export realizations have also been better. However, overall sales volumes dipped from 1.24 million vehicles in the year-ago quarter to about 1.17 million vehicles in the September quarter.
Additionally, lower raw material prices meant the company could control its operating expenses. As a result, Ebitda (earnings before interest, tax, depreciation and amortization) stood at 16.6%, an improvement of about 120 basis points quarter-on-quarter. However, this was lower than the year-ago’s 17.1% .
One test for Bajaj Auto in the slowing two-wheeler sales environment would be to find out whether it could gain market share. The auto market is also transitioning to BS-VI emission norms. On that front, the company has lined up some new launches to aid its market share growth. Besides, the ongoing transition to BS-VI emission norms is not seeing any aggressive pricing by competitors so far, which is a good sign.
It seems like the market is expecting the company to continue to clock improved performances on the back of benign raw material prices and a better realizations environment. However, much depends on the trajectory of sales after the festive season. If it shows signs of improving, investor interest may continue to remain high for Bajaj Auto.
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