Improving product mix aids Bajaj Auto's better-than-expected show in Q2

Volume decline was offset by price hikes and lower commodity costs

Bajaj Auto posted a better-than-expected performance in the July-September quarter beating analysts’ estimates across all parameters. Though overall volumes declined by 12 per cent over the year-ago quarter, improved realisations arrested the decline in revenue.

Revenue for the Pune-based company fell by 4 per cent, even as the volume decline was offset by better product mix, lower commodity costs, price hikes, and exchange rates.

“It was a bad quarter for the motorcycle industry and there was little elbow room. But we have maintained our market share and improved profitability,” said Rakesh Sharma, executive director, Bajaj Auto.

Volume decline was led by a 25-per cent fall in the sales of domestic motorcycles. Exports, up 2 per cent, cushioned the overall fall. Within exports, it was the motorcycle segment that did well, gaining 7 per cent year-on-year (YoY).

Bajaj Auto results mirrored TVS Motor’s. The Chennai-based company, too, posted a sharp 31 per cent fall in domestic motorcycles. The average selling prices of its vehicles was up 7 per cent YoY on improved product mix (higher exports), price hikes, and lower moped share.

For Bajaj Auto, better product mix was led by higher three-wheeler sales and increasing share of exports. Three-wheelers and exports fetch better margins for the company than its two-wheeler portfolio. While the share of three-wheelers was up by 30 basis points (bps) to 16 per cent of volumes, export share was up 600 bps to 46 per cent. The company took price hikes in July and September, which helped bolster overall realisations.

In addition, within motorcycles, the portfolio mix changed for the better. The contribution of 110cc motorcycles during the quarter was 55 per cent, while that of 100cc bikes was 45 per cent. Last year, 95 per cent of sales in the entry-level segment were contributed by the 100cc segment. The company indicated that 110cc bikes fetch better realisations and margins, compared to the 100cc segment.

On the margin outlook, the company indicated that as long as the portfolio mix is similar, margins would not fall from the current levels of 16.1 per cent at the operating level. Margins in the quarter were up on a sequential basis, but down by 90 bps over the year-ago quarter. 

Volume outlook would be crucial for the Street — both for domestic and export markets. The company on an investor call indicated that sales have bottomed out and the last fortnight sales are on a par with the comparable year-ago festive period. The other moving part for two-wheeler sales is the transition to Bharat Stage (BS) VI emission norms from April 1, 2020. Competitive pressures related to discounts or pace of BSVI launches could impact inventory levels as well as the company’s margins. 

TVS Motor had also highlighted weak demand trends and high competitive intensity after the results earlier this week. Brokerages believe that regulatory-driven cost pressures, weak economic growth, and higher dealer inventory could lead to muted sales offtake over the next few quarters.

On the exports front, Bajaj Auto was hopeful of an improvement in sales of commercial vehicles in Egypt, which was impacted after regulatory changes. Exports of commercial vehicles had slid 19 per cent YoY in the September quarter. While muted crude oil prices, worries of currency volatility will be an overhang, the company indicated it has gained market share in key markets that it is present in.