Bajaj Auto braved challenges in Q1 but it’s a rocky road ahead
Premium- Bajaj Auto expects the positive impact of softening costs of metals to be reflected in Q2. But energy costs continue to remain elevated, which is a key concern.
Bajaj Auto Ltd faced numerous challenges in the June quarter (Q1FY23). For one, the semiconductor shortage hurt volumes as they declined by 7% year-on-year (y-o-y) to 933,646 units.
In its Q1 earnings call, held on Wednesday morning, Bajaj Auto said its domestic business was hit the hardest due to this crisis which resulted in depletion of channel stock and hence loss in retail market share.
But this meant a higher contribution from the export business which fetches higher margins. This coupled with price hikes and favourable exchange rate led to an increase in net realization per vehicle by 17% y-o-y and 5% sequentially to ₹85,739 in Q1. This translated into gross profit per vehicle of ₹23,856, a multi-quarter high.
However, Ebitda (earnings before interest, tax, depreciation and amortization) margin contracted by 90 basis points (bps) sequentially to 16.2% due to operating deleverage. One basis point is 0.01%. Bajaj Auto faced headwinds from higher commodity costs, especially in the first half of the quarter.
Even so, Ebitda margin was slightly ahead of analysts’ estimates. For instance, analysts at Motilal Oswal Financial Services had forecasted the measure at 15.7%.
Going ahead, the company expects the positive impact of the softening costs of metals to be reflected in Q2. But energy costs continue to remain elevated, which is a key concern. The company expects the material inflation to be around 1-1.5% of sales in Q2, down from 3% of sales in Q1.
On the demand front, the company sees an improvement in the situation. The demand environment in urban and semi-urban areas is better off than rural areas, currently. With monsoon expected to pick up pace, demand in rural areas is likely to get better.
With respect to some export markets, the management sees weakening macros led by unavailability of dollars and aggravated by inflation. “We expect turbulence in its exports business amid slowdown in few geographies," said analysts at Reliance Securities in a results first-cut note. The analysts see a significant cut in high margin exports business, slower recovery in domestic business and loss of market share in domestic and overseas for Bajaj Auto.
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According to the company, supplies are trailing demand in the short term. The chip shortage situation is likely to ease as Bajaj Auto has new suppliers on board. It further added that May was the worst hit while the ensuing months are better sequentially. Their primary focus in Q2 would be to build inventory back to normal levels.
Meanwhile, in the past one year, shares of Bajaj Auto have risen only 1% in contrast to a 21% rise in the Nifty Auto index. Regaining its lost market share amid an intense competitive environment in the premium segment would be a key trigger for the stock.
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