Operating margin was marred by adverse raw material prices and the price cut initiated by the management in the entry-level motorcycle segment
Bajaj Auto’Q2 FY19 result was a mixed bag. Topline continues to witness strong growth while operating margin posted a significant decline. Operating margin was marred by adverse raw material (RM) prices and the price cut initiated by the management in the entry-level motorcycle segment. Export market has been doing phenomenally well for the company and saw strong volume growth. We continue to like the business, given the rupee depreciation, positive growth outlook in the export market, strong three-wheeler (3W) demand in India and reasonable valuations.
Quarter in numbers
On a year-on-year (YoY) basis, net operating revenue clocked 21.4 percent growth on very strong volume growth (25 percent). Average realisation, however, witnessed a YoY decline of 2.9 percent due to price action initiated by the management in the entry-level segment.
Volume: All segments are firing
In terms of volume performance, Bajaj Auto registered an overall volume growth of 25 percent, aided by a 20.3 percent growth in the domestic market and 32.8 percent growth in exports.
Within the domestic market, motorcycles and 3W segments registered a YoY growth of 18.6 percent and 31.6 percent, respectively. Motorcycle segment volumes grew on the back of price cuts in the entry-level segment and strong demand for mid-executive and premium bikes. The 3W segment, on the other hand, continues to perform well on the back of an end of the Permit Raj.
The company achieved the highest ever monthly export volume in September led by strong demand in Africa, South Asia and Middle East.
Operating performance marred by price cut and RM price riseIn line with the new strategy of gaining market share in the entry-level motorcycle segment, the management initiated a price cut in that segment. This, coupled with a rise in the raw material prices, have impacted earnings before interest, tax, depreciation and amortisation (EBITDA) margin negatively, down 291.8 basis points (100 bps = 1 percentage point) at 16.8 percent.
Factors that work in favour of the company:
Focus on market share in the domestic motorcycle segmentBajaj Auto has started gaining market share in the 2W segment. This is primarily on the back of aggressive pricing strategy adopted by the company. Despite subdued industry demand, the company registered an 18.6 percent volume growth in Q2 FY19. This led to a 170 bps expansion in overall domestic market share, which stood at 18.6 percent. The management has guided at achieving 20 percent market share in motorcycle segment by FY19-end and has a long term target of 24 percent.Operating margin: Product mix, depreciating rupee to provide respite
EBITDA margin has come off from around 20 percent levels it achieved in the last few quarters owing to negative pricing actions taken by the company in the entry-level bike segment. The management said the negative pricing action exist only on 14 percent of total turnover and that could be offset by margin of its premium segment. In fact, the management mentioned that Platina is doing well in the entry-level segment and is profitable for the company. Also, strong traction in sports bikes and new launches in premium segment would aid margin.
Recent rupee depreciation is expected to aid margin. The management said they would be able to realise over Rs 70 per dollar in Q3 and Q4 and above Rs 73 per dollar starting from Q1 FY20 as compared to Rs 69.4 per dollar which it realised in Q2 FY19.
No permit regime for alternate fuelled 3WsThe overall 3W market continues to gain strength after end of the Permit Raj in Maharashtra and new permits in Delhi. This has led the company to post strong volume growth in 3W segment. In fact, it registered a 32 percent volume growth in the 3W segment.
In a recent announcement, the government has abolished the permit regime for 3W, fuelled by alternate fuel. This is expected to augur well for the company, given its 86 percent market share in the space.
In light of strong demand expectations, the company has planned to expand 3W capacity to 1 million units from 0.85 million units.
Improving exportsExports seem to be stabilising and is expected to benefit Bajaj Auto as it generates more than 40 percent of its revenue from overseas. In Q2, it registered a 33 percent growth in export volumes. It currently has a 45 percent market share in Africa and that may rise to 50 percent in years to come.
The management said they would continue to focus on exports and new markets and has guided at exports of 2 million units in FY19, up from 1.6 million units sold in FY18.
Reasonable valuationAmid overall market volatility, the stock has corrected 29 percent making valuations reasonable. The company is currently trading at 15 times and 13 times FY19 and FY20 projected earnings, respectively.
