Bajaj Auto cruises through tough Mar quarter, but a bumpy road ahead

Bajaj Auto Ltd’s robust March quarter (Q4FY20) performance, in spite of a covid-19-led slowdown in sales, took investors by surprise.

Bajaj’s earnings before interest, tax, depreciation and amortization (Ebitda) margin rose to 18.4%, compared to the Street’s estimate of margins of about 16%.

Analysts say that a higher share of three-wheelers and premium two-wheelers in the sales mix, decent exports, and a favourable foreign exchange rate helped margins. Realizations per vehicle, therefore, jumped by 10.5% year-on-year (y-o-y).

Click here to enlarge graphic

This partially offset lower operating leverage caused by the 17% y-o-y fall in sales volume. Higher realizations and better-than-expected revenue for the quarter also lifted operating profit. The Street had pencilled in a drop in Ebitda y-o-y. But, Ebitda at ₹1,253 crore was 21% higher than the average estimate of 18 analysts, as compiled by Bloomberg. Indeed, the March quarter performance is bound to enthuse investors, as is reflected in a 2.7% rise in the stock. However, there are strong headwinds in the coming quarters.

Although half its dealerships are operational since the lockdown was eased in the country, sales will be under pressure. Risk aversion in financing, along with cost pressures due to the BS-VI transition, could weigh on entry-level motorcycle sales. A note from JM Financial Services Ltd says that the current slowdown may impact the 41-44% of customers who upgrade vehicles.

Industry experts say there is lower cash availability with customers due to job losses or salary cuts. This will hurt two-wheeler sales in the near term. It remains to be seen whether social distancing norms will fuel demand for two-wheelers. The offsetting factor is that there will be demand for personal mobility vis-a-vis shared transport.

But the pandemic may weigh on domestic three-wheeler sales, if people avoid public transport. Any drop in the segment’s sales will dent overall profitability, as it enjoys higher margins compared to two-wheelers. Further, there is uncertainty on exports, given that its key customers are oil producing countries, where economies are under the duress of falling crude oil price. As such, retail sales (exports) are down to about 35% of normal levels, due to partial lockdowns in some of these countries.

“We expect similar slowdown to continue for next two to three quarters. Lower exports volume in African markets, intensely competitive two-wheeler space, delayed recovery in high-margin three-wheeler segment and moderation in return ratios would weigh on the stock,” says Mitul Shah, vice-president, research, at Reliance Securities Ltd. Most analysts have downgraded the FY21 earnings estimate, on account of demand pressures.

After all, the first half of the year would be dampened as lockdown hit sales. Bajaj Auto shares are now 20% lower compared to their highs in early February, and have performed slightly better than the broad market.