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Bajaj Auto Q1 earnings: A blip or should you be concerned?
Publish Date: 26th July, 2018
Bajaj Auto Q1 numbers: Things you should know
Bajaj Auto Ltd (BAL), India’s fourth largest two-wheeler company, disappointed Dalal Street on July 20 by posting lower-than-expected numbers for the first quarter ended June 2018. While the overall volume growth was impressive, the company slipped on profitability by pursuing a strategy of cornering a bigger market share over the next few years.
Earnings snapshot
Profit Growth Revenue Growth Rs 1,115 crore 20.7% Rs 7,419 crore 36.3% What pulled the margins down?
- Deterioration in product mix
- Deep discounting in domestic motorcycle segment
- Weakening domestic motorcycle franchise
- Higher employee cost owing to bonus and other sales incentives
- Weak export realisations despite highest-ever sales
- Sharp increase in cost of raw materials like steel, aluminium, and lead
The maker of the Pulsar motorcycle isn’t really flexing its muscles to meet street expectations. It recorded highest-ever exports in the Q1 period, yet fumbled on average realisations, despite a depreciating rupee against the US dollar.
Grey areas
1. Weakness in domestic motorcycle franchise: BAL's domestic market franchise has been weakening which remains a concern. The loss of market share over the last few years and price cuts announced in both the economy and premium bike segments bear testimony to it. The company has admitted that CT100, after recent price cuts, is an EBITDA negative product.
2. Sustained aggressive pricing: The company’s decision to go for aggressive pricing to gain market share at the expense of margins will impact its financial performance going ahead.
3. Flat EBITDA margins: The EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin, which is a measure of operating profitability of the company, remained flat at 18.4% as compared to the year-ago period. It is unlikely that a lot will change any time soon, given the company’s fixation on gaining market share at the expense of margins.
The way forward:
- BAL is pursuing a bigger market share in the domestic motorcycle segment through CT100 and Platina over the next two or three years. The target is to corner a market share of 24% in the domestic motorcycle segment, up from the current 16%.
Our take: This does not augur well for an industry where the volume segment drives growth. Hero and TVS—BAL’s closest competitors—will also be impacted. Profitability for the industry is bound to fall. - The company is targeting a bigger market share for Pulsar, more volumes for Discover, and strong demand for CT100 post price cuts of Rs 3,000–3,500. It hopes to corner a market share of 45% in entry segment motorcycles as compared to around 33% currently, and expects the overall motorcycle market share to improve to 20% from the current 16%.
How we see it: The expectations are optimistic and there may only be a marginal gain in market share for the company’s domestic motorcycle segment in the subsequent quarters this fiscal. - New permits to be issued by Telangana, Delhi, and Bangalore will drive the demand for three-wheelers. The company will launch the Qute vehicle (quadricycle) for retail sales in Kerala and the North-East states next month.
- The company expects export volumes of two million units in FY19—a 22% year-on-year growth. Oil-rich Nigeria and Egypt have become lucrative markets following the rebound of oil prices in international markets. Cambodia, Iraq, and Ghana saw significant volume growth in the three-wheeler segment.
What we feel: The company could sell 814,149 units of three-wheelers in FY2019. - Employee cost rose in Q1 FY19 due to a special bonus given to employees on achieving annual targets.
The way we see it: This run rate could be sustained if targets keep getting achieved.
What our research suggests:
‘We downgrade the stock to REDUCE (from BUY earlier) with revised price target of Rs 2,808 (earlier Rs 3,303). We lower our target PE multiple from 18x to 17x,’ our researchers say.
What next?
Like any other stock, the future trajectory of BAL’s shares will depend a lot on the company’s upcoming earnings announcements.
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