News Analysis

Q3 comment | Bajaj Auto : Superior product and market mix drive profitability

Parvatha Vardhini C BL Research Bureau | Updated on January 30, 2020 Published on January 30, 2020

Margin expansion and lower taxes help post a double-digit profit

Despite the slowdown in domestic motorcycle sales, Bajaj Auto has reported a good set of numbers in the quarter ended December 2019. Better export volumes, which brought in higher realisations, lower input costs as well as benefit of reduction in corporate tax rate have helped the company clock a 14.5 per cent growth in net profit to ₹1,261 crore over the December 2018 quarter.

Better product mix

Though total volumes dropped by 4.5 per cent year-on-year, the company managed to show a 2.6 per cent growth in revenues to ₹7,436 crore. A 7.5 per cent growth in average realisation due to superior product mix helped the company. Volume growth in domestic three-wheelers and higher international sales improved realisations.

Three-wheelers and exports are among the more profitable segments for the company. Domestic three-wheeler volumes grew by 6 per cent as against the 16 per cent fall in motorcycle sales. Export volumes grew by 7 per cent driven by good demand in Africa, Latin America and Sri Lanka. The company also benefited from the depreciation in rupee. Average realisation per US dollar was ₹71.3 in the third quarter of this fiscal as against ₹68.5 in the corresponding quarter previous fiscal. International sales during the quarter constituted 43 per cent of net sales.

Lower input costs helped operating margins. Raw material cost as a percentage of sales came in at 69.4 per cent during the quarter, a drop from 75 per cent a year ago. Operating margins expanded by 150 basis points year-on-year to 17.8 per cent. Thanks to the reduction in corporate tax rates announced a few months ago, tax as a percentage of profits stood at 24.5 per cent, compared with 29.3 per cent last year. This resulted in tax outgo dropping by 10 per cent. Higher operating margins and lower tax outgo aided double digit profit growth.

Outlook

While the company expects international business to show stable performance in the near future, the transition to BS-VI may delay the recovery in domestic motorcycle sales. The company has commenced dispatches of BS-VI vehicles to dealerships and the price hike is between ₹6,000 and ₹10,000 across the motorcycle portfolio, according to the management.

At a time when domestic consumer is reluctant to loosen his purse strings, this increase could be a dampener. However, the company is expected to be in a better position than peers as its international exposure shields it from these uncertainties. Recognising this, the stock has gained about 25 per cent in the last year. It now trades at a valuation of 17.5 times its trailing twelve month earnings, higher than peer Hero Moto Corp’s 14.5 times. Hence, near-term upside may be limited.

Published on January 30, 2020
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