(Photo: Abhijit Bhatlekar/Mint)
(Photo: Abhijit Bhatlekar/Mint)

Bajaj Auto’s market share gains aren’t resulting in profit growth

  • Bajaj Auto beat competitors hands down in fiscal year 2019 with volume growth of 28.7%
  • Meanwhile, valuations are rich at 19 times trailing earnings, despite dull earnings growth

It’s a well-known fact that Bajaj Auto Ltd has beaten competitors hands down in FY19. While the company reported growth of 28.7% in the domestic two-wheeler market in FY19, all other competitors put together grew volumes by just 2.3%. As this column has pointed out, Bajaj Auto’s aggressive pricing strategy in the entry-level commuter category did the trick for it.

But aggressive pricing also means lower profit margins, and this has been a concern for some investors. So, how has Bajaj Auto done on this front in the March quarter? To cut a long story short, the message on the margins front is not very encouraging. Despite meaningful tailwinds, Ebitda margin widened by only 10 basis points sequentially. What’s more, they are down 370 basis points compared to a year ago. Ebitda is short for earnings before interest, tax, depreciation and amortization.

The tailwinds were in the form of better-than-expected price realizations in the last quarter. Even though volumes fell 5.3% compared to the seasonally better December quarter, revenues were more or less flat at 7,225 crore. Average price realization rose 5.3% sequentially, thanks to a better product mix.

In addition, the company had the benefit of softer commodity prices. Some analysts were expecting margins to rise 40-50 basis points sequentially with much lower revenue assumptions. The fact that Bajaj Auto reported a mere 10 basis point improvement in margins, despite reporting higher-than-expected revenues, is clearly a negative.

So, for all the excitement about the company’s strong volume growth, the fact remains that Ebitda fell 12.6% year-on-year in the March quarter. For the year as a whole, Ebitda rose just 3%, despite an 18% rise in operating revenue.

Of course, the majority of investors are cheering Bajaj Auto’s strategy of aggressively pursuing market share in the domestic market, even if profit growth is sluggish. Its stock is up about 8% in the past one year, compared to the 27% drop in the stock of Hero MotoCorp Ltd and a 17% fall in TVS Motor Co. Ltd’s stock.

“We expect to continue outpacing industry growth rates; we are driving with our feet hard on the accelerator, and are pursuing growth through new product launches and branding and marketing initiatives," the company management said on a call with analysts.

Apart from the pressure on margins, Bajaj Auto has also reported a large rise in receivables. The company said that debtor days have risen by four-five days, which is understandable in the backdrop of an unusually tough year for the automobile sector, where inventories were rising.

In this backdrop, Bajaj Auto’s trailing price-earnings multiple of around 19 times looks rich, especially since earnings are expected to grow only about 10% annually in the next two fiscal years.

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