Home >Markets >Mark To Market >Bajaj Auto exports its way out of a slump

Bajaj Auto Ltd did see the impact of higher commodity prices and covid-led disruptions during the June quarter. While the year-on-year (y-o-y) change looks high because of a low base, sequentially domestic performance and margins did take a beating on account of the second wave.

Domestic two-wheeler sales rose 84% y-o-y, but declined almost 30% sequentially. Domestic three-wheeler sales saw a higher impact. However, the strength of the company lies in exports and this cushioned its overall performance.

Motorcycle exports remained unchanged sequentially, despite the impact of covid in some East African and Asean nations. Three-wheeler exports, too, remained strong and commercial vehicle exports grew 21.7% sequentially. Thanks to the decent export volumes, overall vehicle sales were just 14% lower sequentially. Revenues from operations were about 16% lower sequentially, even though they more than doubled on a y-o-y basis due to the low base effect.

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But there was a double whammy in store, in terms of rising commodity prices and their impact on margins. Prices of steel, aluminium and other metals continued to surge. And given the weakness in domestic sales, the firm had limitations with regards to price hikes. Hence, margins declined 220bps sequentially to 15.6%, and were below Street expectations. For instance, analysts at Motilal Oswal Financial Services Ltd expected higher exports contribution and price hikes taken earlier to dilute the impact of cost inflation and pegged Ebitda margins at 17.1%. Given the disappointment on the earnings front, the stock closed more than 1% lower on Thursday in an otherwise strong market.

Analysts, however, feel that with the recovery in economic activity post easing of pandemic-led curbs, three-wheeler sales should recover. The pace of pick-up in monsoon bodes well for an increase in two-wheeler sales. The firm also has a lower dependence on entry-level motorcycles, where the impact on sales and margins is much higher. In the 125cc plus segment, which contributes 60% to domestic motorcycle sales, Bajaj Auto’s market share rose 25% in Q1 from 22% in the last quarter.

Mitul Shah, head of research at Reliance Securities Ltd, says, “We expect its exports business to witness a healthy growth in FY22E on the back of positive traction in the African market."

Shah also expects higher-margin domestic three-wheeler business to bounce back strongly in FY22. The domestic two-wheeler segment is also expected to witness gradual recovery starting Q2FY22.

Bajaj Auto also announced the formation of a wholly-owned unit that will leverage growth opportunities in the evolving mobility space and manufacturing of electric and hybrid vehicles. Aditya Makharia, institutional analyst, HDFC Securities, said Bajaj Auto has a longstanding relationship with KTM and this should further benefit the company in its EV endeavour.

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