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Bajaj Auto: Scoring on margins, valuations


After a better-than-expected performance from Hero MotoCorp (HMC), Bajaj Auto, too, did not disappoint. Aided by a 16 per cent year-on-year jump in volumes and higher exports, the Pune-based company posted a 21 per cent increase in turnover to Rs 5,342 crore for the quarter ended September 2011. In addition to volume growth, a significant improvement in the average selling price to Rs 43,350, up three per cent annually, was the key reason for revenue increase, Chirag Shah of Emkay Global believes. Export realisations, too, moved nine per cent up annually, driven by increase in prices and a favourable forex movement.


While sales were in line with expectations, net profits at Rs 726 crore, up six per cent year on year, were below estimates. This was due to an Rs 95 crore mark-to-market loss on forward currency contracts. Adjusted for this, the company’s net profits were at Rs 790 crore, up 16 per cent annually. The key figure that stood out was Ebitda margins at 20.1 per cent. Though it was slightly lower on a year-on-year basis, it is an improvement over 19.1 per cent in the June 2011 quarter. This was at the upper end of analysts’ expectations, and came on improving export realisations, operating leverage and rationalisation of ad spends. Going ahead, given that the company has increased prices from October 1 (Rs 500) on Discover and Pulsar and commodity prices have stabilised, margins are likely to be maintained.

At the current rate of 2.2 million units for the first two quarters, Bajaj Auto is likely to surpass the four-million-mark in the current financial year, which should help it report 18 per cent volume growth in FY12, compared to the previous financial year. The Bajaj Auto management has set a target of 20 per cent annual growth for the overall sales for FY12. Its bigger rival, Hero MotoCorp, too, had a good quarter with volumes growing 20 per cent year-on-year. Hero expects to close the year at 6.2 million units, a 16 per cent increase over FY11.

What puts Bajaj Auto ahead of its bigger rival Hero MotoCorp are exports, which contributed 36 per cent of sales volumes and 32 per cent of its turnover during the quarter. In fact, exports grew 37 per cent providing a cushion to sales in the September quarter wherein domestic volumes grew just eight per cent. Analysts say that given the uncertainty on export incentives, the company focussed more on the overseas markets improving its share from 33 per cent of sales in the earlier quarter. Further, the lower domestic volumes were on the back of a higher base, given the new launches (Discover 100, 150) in the last financial year. Though there were apprehensions about the ability of the company to maintain margins after the reduction in export benefits, given the increase in prices (3.5 per cent) on exports and the recent policy of one per cent export incentive till March 2012, the company is likely to gain from a surge in export sales.

Despite the export focus, Bajaj Auto improved its domestic market share by 150-200 basis points to 27 per cent compared to the June quarter. The management has indicated that the increased production and sales of Boxer in the rural markets as well as higher sales from its Discover and Pulsar brands should help increase its domestic market share to the 30 per cent mark by the end of 2011-12. Analysts, however, believe the company will end the year at 27 per cent, given Hero’s dominance in the rural segment (40-45 per cent of sales) on the back of continuing strong sales of Splendor and Passion variants.

While Hero has performed better than Bajaj Auto in the quarter, analysts back the smaller rival on counts of profitability and valuations. Despite Hero’s numbers looking up, there continues to be a 650-basis-point gap between the two on Ebitda margin. While Bajaj Auto is available at 15.4 times FY12 estimates, Hero’s valuations are more demanding at 17.5 times. Moreover, Hero being in a transformation phase and is likely to take time to stabilise in its new avatar.