Bajaj Auto needs a home Discovery

While export is holding up, falling share in the domestic motorcycle segment continues to be a key worry

Bajaj Auto’s March quarter performance disappointed the market, reflecting the falling volumes of its motorcycles in the domestic market. Muted operational performance, coupled with lower other income and higher taxes, saw net profit fall 0.2 per cent over a year to Rs 764 crore.

Most analysts had pegged the net profit number in the Rs 800-900 crore range. Higher other expenditure, up 13 per cent year on year, and foreign exchange losses pegged back Ebitda (earnings before interest, taxes, depreciation and amortisation) margins. Even after adjusting for forex losses, the margins at 19.6 per cent were lower than the estimate of 20.6 per cent, according to Yaresh Kothari of Angel Broking.

On revenues, despite a five per cent fall in overall volumes, the company managed to post a four per cent growth to Rs 4,932 crore on account of higher export realisations. The revenue number was slightly better than expectations.  

Exports have been the only bright spot in the otherwise poor operational show by the Pune-based company. The Street was not impressed, resulting in the stock shedding 4.2 per cent in trade on Thursday.

Given the export strength, more than half the analysts tracking the company have a 'buy' rating, with a consensus target price of Rs 2,125, a nine per cent upside from current levels.

Domestic worries
The Street will be keenly watching sales volumes on the home front, as the company lags its peers. Domestic motorcycle volumes fell 12.7 per cent in the quarter and 15 per cent over a year in FY14. Of this, volumes for Discover fell 25 per cent in FY14, according to analysts.  Sales of Hero MotoCorp’s key brands were up one per cent in FY14. In addition to the lack of traction in Discover volumes, what has hurt the company is its absence in the scooter segment, which continues to outperform the overall two-wheeler market. In fact the company’s market share in the two wheeler segment is at a all time low level of 14.2 per cent.

While the company has targeted a market share of 24 per cent in the motorcycle segment in the coming quarters, on the back of launches in November 2013 (Discover 100M) and March 2014 (Discover 125M), analysts are sceptical about its ability to achieve that number from the FY14 share of 20 per cent. The company’s share of the motorcycle market dropped 440 basis points (bps), from 24.4 per cent in FY13.

Says an analyst with a foreign brokerage, “The company has not only to contend with aggressive competitors in the 100-125cc segment, it has also not been able to resolve confusion in the customer mind about various models of the Discover and Pulsar, their price points and features.”

Further, the impact of Honda Motorcycle and Scooter India going down the value chain into the high volume segment has been more on Bajaj Auto than market leader HeroMotoCorp.

Exports a bright spot
What is holding up for the company is export, especially of three-wheelers. While domestic revenue declined 10 per cent, export revenue surged 30 per cent, aided by a favourable currency and nine per cent growth in volumes. This was reflected in realisations as well. While domestic realisations were up three per cent, export realisations improved 19 per cent, due to the good show in three-wheelers, say analysts.

The share of export in overall volumes rose 440 bps to nearly 41 per cent in FY14, with the two per rise in volumes and 11 per cent fall in domestic sales. Going ahead, the management has indicated that exports would be around 40 per cent of volumes.