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The margin outperformance was driven by multiple tailwinds. (Mint)
The margin outperformance was driven by multiple tailwinds. (Mint)

Bajaj Auto changes gears on profit growth in Q3; demand concerns remain

  • Nomura sees flat y-o-y growth in FY21. Perhaps, this is why the stock rose just 2% despite the strong beat in profits
  • The highlight of the quarter was a 160 basis points jump in Ebitda margin year-on-year to 17.9%—the highest in six quarters

Bajaj Auto Ltd surprised the Street with better-than- expected profitability in the December quarter even as higher exports offset some of the pain in the domestic market.

The highlight of the quarter was a 160 basis points jump in Ebitda margin year-on-year to 17.9%—the highest in six quarters. Importantly, the reported margins exceeded analysts’ estimates by nearly 200 basis points. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Graphic: Naveen Kumar Saini/Mint
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Graphic: Naveen Kumar Saini/Mint

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The margin outperformance was driven by multiple factors, starting with an improvement in realizations. Average price realizations rose 8% year-on-year, a relief in a challenging quarter. “This can be explained by its healthier product mix and price hikes, which offset the slowdown in sales volumes," said Bharat Gianani, analyst at Sharekhan Ltd.

Another factor that drove Q3 profit is the company’s diversified product mix. Three-wheelers, which comprise about 15% of its total sales, enjoyed better profit margins than two-wheelers. The share of three-wheelers in total sales was a tad better from a year ago.

Further, the 11% rise in two-wheeler exports, which again brought in better realizations, offset demand weakness and margin pressure in the domestic market. Of course, benign commodity prices and lower other expenses also helped operating performance.

All these factors pushed up the quarter’s Ebitda by 12.8% year-on-year to 1,367.2 crore.

However, Bajaj Auto is no exception to the challenges in the coming quarters for the auto industry and for two-wheelers in particular.

A report by Nomura Research on estimated auto sales for January said domestic two-wheeler sales volumes may decline 11% from a year ago. While this is narrower than the 17% drop in December, the sharp price hikes for Bharat Stage-VI models are headwinds for sales growth. The brokerage forecasts flat year-on-year growth in FY21. Perhaps, this is why Bajaj Auto’s stock rose just 2% despite the strong beat in profits.

That said, Bajaj Auto is relatively insulated from the BS-VI transition woes because of its diversified product mix. The norms are not applicable on exports and on three-wheelers, both of which enjoy higher profitability. Further, only 29-30% of its two-wheeler sales are in the entry-level category, where the price hike due to BS-VI norms will be the highest. It is at an advantage compared to Hero MotoCorp Ltd, which has a 70% exposure to this segment.

But, while Bajaj Auto looks relatively better poised for sales and profit growth on these counts, the overall pressure on demand will continue to act as a headwind.

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