Bajaj Auto's much-touted aggressive pricing strategy has resulted in market share gains at the cost of Honda, Hero MotoCorp and TVS. (Naveen Kumar Saini/Mint)
Bajaj Auto's much-touted aggressive pricing strategy has resulted in market share gains at the cost of Honda, Hero MotoCorp and TVS. (Naveen Kumar Saini/Mint)

Investors impressed with Bajaj Auto's market share gains need to count costs

  • Since commuter bikes account for nearly one-fifth of Bajaj Auto’s overall sales, its pricing strategy will result in lower realizations
  • However, performance of exports and commercial vehicles (three-wheelers) may partially alleviate margin pressures for Bajaj Auto

Mumbai: Bajaj Auto Ltd is an outlier among two-wheeler stocks. It has risen 9% in the past year, at a time when shares of peers, such as Hero MotoCorp Ltd and TVS Motor Co. Ltd, have fallen by 27% and 24%, respectively. The benchmark Nifty Auto Index has also corrected 22% in the same period.

Surely, Bajaj Auto’s much-touted aggressive pricing strategy has worked well for it. The company has clawed back market share losses of the previous year. But the million-dollar question is, if this will translate into higher earnings, which is key to sustaining valuations.

The margin forecast for the March quarter is far from optimistic. Jefferies India Pvt. Ltd expects a 340 basis point Ebitda margin contraction year-on-year due to the competitive pricing strategy. On a similar note, Motilal Oswal Securities Ltd has factored in a 320 basis point drop in margins.

Ebitda is earnings before interest, tax, depreciation and amortization.

Hundred basis points equal one percentage point.

Note that the company’s FY19 domestic motorcycle sales surged by 29%. This was primarily due to an increase in commuter bike sales, where the pricing strategy helped increase its market share by nearly 500 basis points. Meanwhile, peers such as Honda Motorcycle and Scooter India Pvt. Ltd and Hero MotoCorp, suffered market share losses.

Since the entry-level motorcycle segment accounts for nearly one-fifth of Bajaj Auto’s overall sales, the pricing strategy will result in lower realizations. Analysts have estimated 6-8% year-on-year fall in average blended realizations for the March quarter. Obviously, this would weigh on revenue and profit growth for Q4 and the full year.

That said, there could be some positives in the March quarter earnings. The performance of exports and commercial vehicles (three-wheelers) may partially alleviate margin pressures. Besides, management commentary on the road ahead for the entry-level and premium two-wheeler market, wherein intense competition is taking a toll on profitability, will be key to the stock’s valuation.

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