News Analysis

Bajaj Auto enjoys an easy ride

Parvatha Vardhini C, BL Research Bureau | Updated on May 24, 2020 Published on May 21, 2020

Rajiv Bajaj, MD, Bajaj Auto   -  PAUL NORONHA

Superior mix, lower taxes, exports, aid profit; domestic two-wheelers could be key driver

Despite the challenges from the Cov-19 pandemic, Bajaj Auto posted a good set of numbers for the three months ended March 2020.

Even as volumes were down by 17 per cent year-on-year (y-o-y), the company managed to contain the fall in revenues to about 8.5 per cent to ₹6,611 crore.

A better product-mix arising from higher share of commercial vehicles (three-wheelers) in the domestic market and exports helped.

These segments bring in higher realisations than motorcycles.

The depreciation of rupee against the dollar aided better export realisation. Exports constituted 51 per cent of the total volumes during the quarter, against 40 per cent a year ago.

A richer product-mix and lower raw material cost resulted in expansion in operating margins. The raw material cost as a percentage of sales stood at 67.9 per cent vis-à-vis 69.6 per cent in the March 2019 quarter. The operating margin moved up by 1.8 percentage points to 18.4 per cent. A 44.8 per cent rise in ‘other income’ and lower taxes aided profit.

Tax expenses dropped as the company adopted the new corporate tax rate. Profit (without considering exceptional income in the March 2019 quarter) grew by 35.8 per cent y-o-y to ₹1,310 crore.

The Bajaj Auto stock has been among the more resilient in the auto sector, losing less than 15 per cent since February 20. It now trades at 15.2 times its trailing 12-month earnings, at a premium to Hero MotoCorp (12.2 times) and a discount to TVS Motor (22.5 times).

Outlook

Though the domestic market remained sluggish in 2019-20, the company benefited from a recovery in exports. Export volumes grew by 4 per cent last fiscal, while domestic volumes declined by 17 per cent. Exports were aided by good motorcycle demand in Nigeria, East Africa, Egypt and the Philippines, which have been putting up a steady show in the past few quarters.

Into fiscal 2020-21, exports may face headwinds in the aftermath of Covid-19-related lockdowns as well as the fall in crude prices,s impacting demand in key markets such as Nigeria which are oil-based economies.

Besides, exchange rate concerns due to devaluation of the Nigerian currency remain. Overall, Bajaj Auto has seen lockdowns in all countries that it exports to. While retail sales have opened up in most geographies, it is currently at 35 per cent of normal levels.

With dealerships slowly getting back to business in India, too, the company is presently seeing offtakes at 25 per cent of normal levels. While its three plants are ready for operations at 50-75 per cent of the capacity, the demand as of now is nowhere close to that.

The company expects a recovery only in the second half of this fiscal. When it happens, the domestic two-wheeler business may come to the company’s aid this year. For one, the relatively lower impact of Covid-19 in rural markets, good rabi crop and monsoon, along with employment opportunities from MGNREGA, could see rural demand for bikes improving.

In the past two years, Bajaj Auto focussed on improving volumes in the entry segment bikes, which cater predominantly to the rural market.

The company’s market share in the 75-110 cc segment stood at about 17.1 per cent in 2019-20, a big jump from 12.8 per cent in 2017-18. Second, urban demand for motorcycles could also pick up, following a preference for personal vehicles after the pandemic.

The company does not foresee downgrading by customers to lower segment bikes in the wake of factors such as pay-cuts.

It rather sees customers placing more emphasis on value within a particular segment. The company’s strategy to attract customers by introducing variants of existing bikes at incremental engine capacities and different price points (CT 110, Platina 110 H and Pulsar 125 being examples) will continue to hold it in good stead.

While a return in domestic two-wheeler demand could help volume growth to an extent, three-wheeler sales could slow down due to the tendency to avoid public transport.

This, along with a slowdown in exports could see margins being impacted, as these are the more profitable segments.

Published on May 21, 2020
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