Bajaj Auto Ltd has bucked the slowdown in two-wheeler sales for several quarters, but margin pressure continues as the product mix is beginning to hurt the company.
True, June quarter Ebitda (earnings before interest, tax, depreciation and amortization) margin of 15.4% is broadly in line with estimates. This may be a relief for investors. However, it has declined by 250 basis points from the year-ago period. According to Bharat Gianani, analyst at Sharekhan Ltd: “Aggressive pricing strategy in domestic market, high cost pressures and adverse product mix resulted in the margins declining." A basis point is one-hundredth of a percentage point.
Margin pressure was also fuelled by increase in employee costs and other expenses that rose at a faster pace than the muted 4% growth in the company’s revenues.
That said, the 1.7% increase in sales volumes along with improved realizations were key positives that hold promise in times of an extreme slowdown. Average selling price increased by 2.4% year-on-year.
Note that dealer feedback in June indicated highest stress and inventory pile-up in the two-wheeler and commercial vehicles segment. Therefore, Bajaj Auto’s revenue expansion of 4% is respectable.
Overall, the company’s net profit remained flattish over the same period last year to ₹1,125 crore, slightly higher than Bloomberg’s consensus estimate of ₹1,081 crore. Strong other income growth also helped profitability.
To be sure, it is not as if June quarter results are going to materially change the outlook for the company. For one, the slowdown seen in the auto industry is expected to continue. Analysts expect the road to recovery to be slow.
“We see multiple headwinds to Bajaj due to deceleration in volume growth, continued margin pressure, dilution of domestic 2 wheeler brands, and electric vehicle disruption in 3 wheelers," says Arya Sen, analyst at Jefferies India Pvt. Ltd in a report on 15 July.
Little wonder then that Bajaj Auto’s shares have declined as much as 10% since April. Echoing the same sentiment, Mitul Shah, vice president (research) at Reliance Securities Ltd, said: “We expect Bajaj Auto to face similar margin pressure on account of slump in domestic as well as exports three wheeler segments, intensifying competitive environment in domestic two wheeler space and lower exports growth." Importantly, he adds that exports would not be sufficient cushion for margin expansion.
At the current market price of ₹2,618.65, the Bajaj Auto stock trades at about 15 times estimated earnings for FY20. However, given the expected stress on margins and sombre demand outlook, expansion in valuations is unlikely to occur in a hurry.