Strong CV business, robust exports offset domestic weakness for Bajaj Auto

The company is hoping to reverse the weak domestic two-wheeler volume trend

Bajaj Auto was the biggest loser among Sensex companies on Friday: Disappointing earnings, coupled with overall selling pressure in the markets, saw the stock shed 4.9 per cent. While its top line performance for the quarter ended December 2017 was in line with estimates, the company disappointed both at the operating and net profit levels.

First, the volume performance. The company is trailing its peers as far as motorcycle volumes are concerned. Bajaj Auto’s domestic two-wheeler sales grew just two per cent over the year-ago quarter, while peer TVS Motor reported a 27 per cent increase in the same period. Analysts at Jefferies said that underperformance in domestic motorcycles continued in the December quarter and remains a structural concern for Bajaj Auto.

While the company continues to do well in the entry-level segment with the CT and Platina models, sales of which are up 19 per cent, new launches have not been as successful. Analysts at ICICI Securities say that though the company’s performance has improved in overall volume terms, no participation in the growing scooter segment and failure of recent launches like Avenger and V12/15 are a cause for concern.

However, what is working for Bajaj Auto is the strong showing of its commercial vehicle (CV) portfolio. New permits in Delhi and an open market in Maharashtra helped the company double its CV sales to 110,000 units in the December quarter. Exports of both CVs and two-wheelers have done well, posting a growth rate of 22-48 per cent over the year-ago period. These are driven by an uptick from new markets and recovery in large traditional markets such as Nigeria. Higher exports helped the company post an overall volume growth of 18 per cent in the December quarter.

Given the increasing proportion of sales in the overall portfolio of the more-profitable three-wheelers, realisations and gross margins (indicates profitability after considering the cost of output sold) were robust in the third quarter. What spoilt the show, however, were higher other expenses, which led to operating profit margins of 19.3 per cent, which was below estimates. The bottom line, too, was lower than estimates, given lower other income on the back of a mark-to-market loss on its investment portfolio due to rising bond yields.

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To stem the slide and improve volumes as well as market share in the motorcycles segment, the company launched a slew of bikes in January, 2018. These launches include the New Discover 110 and Discover 125 and the new Avengers – Cruise 220 and Street 220. Some of this is reflected in the volumes for January as the company posted 36 per cent domestic growth in motorcycles. Overall growth, including commercial vehicles (CVs), grew 46 per cent year-on-year on a weaker base in January. While 2018 has started on a good note for Bajaj Auto, the street would surely keep an eye on how the trend develops in the coming months.