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Thanks to improving demand for bikes as well as better prospects in the export markets, Bajaj Auto posted double-digit growth in revenues and profits in the quarter ended June 2018. However, the stock was beaten down by 9 per cent on Friday after the results announcement, due to lower-than-expected profit growth as well as disappointment on the operating margin front.
Margins disappoint
For the April-June 2018 period, revenues grew by 26.6 per cent year-on-year to ₹7267 crore backed by a healthy overall volume growth of 38 per cent. Export volumes grew by 31 per cent with important markets such as Nigeria and Egypt leading the way. A depreciation of the rupee against the US dollar also helped improve realisations to ₹67.4 to a dollar from ₹66.8 to a dollar in the June 2017 quarter.
Exports bring 35-40 per cent of the revenues for the company. However, though domestic motorcycle volumes grew by 39 per cent, a good chunk of it was driven by the strong sales in entry bikes (75-110 cc bikes) such as the CT 100 and the relaunch of the Discover 110. The company took a price cut of ₹3,000 for the CT 100 in March 2018. Thus, the adverse product mix as well as price cuts brought down domestic realisations. This, along with pressure from higher input costs affected operating margins. Raw material cost as a percentage of sales moved up to 71 per cent from 65 per cent a year ago. Thus, operating margins came at 17.3 per cent, compared with 20.7 per cent a year ago.
While reported profits grew by 20.6 per cent year-on-year to ₹1,115 crore, adjusted profit growth stood at a lower 16.6 per cent. In the June 2017 quarter, the company had incurred an exceptional expense of ₹32 crore for compensation given to dealers towards transition to GST.
Going forward, volume growth in bikes could remain strong due to launches such as CT100 ES, Platina ES, Platina Comfortec in the entry segment. But margins may remain under pressure. A better product mix tilted towards executive and premium bikes remains key for profitability on the domestic front.
On exports, the company is targeting 1.9 million units this fiscal, a growth of about 14 per cent over the export numbers achieved in 2017-18. With the fortunes of its key export markets recovering, this looks achievable.
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