The Bajaj Auto stock fell 2.6 per cent to Rs 1,574 on Thursday post its March 2012 quarter results, which were below expectations. While slowing domestic volumes led to unimpressive revenue growth of 11 per cent year-on-year for the quarter, the company’s adjusted net profit was up 12 per cent to Rs 759 crore, slightly below expectations. Reported net profit was down 45 per cent at Rs 772 crore due to an exceptional income of over Rs 600 crore in the year-ago quarter.
Though the company was able to maintain its margins on a year-on-year basis, they were down sequentially due to, change in product mix. Going ahead, the management is guiding for a 16 per cent growth in overall volumes to five million units in FY13. A large part of this growth is expected to come from exports and three-wheelers, while domestic two-wheeler volume growth is expected to be muted, at about five to six per cent. Analysts are, however, more sanguine about its domestic two-wheeler growth, which they feel is likely to be between 1-3.5 per cent and overall volume growth at about six to seven per cent (lower than management guidance).
The slowdown in the domestic segment, as well as increase in competitive pressures, is worrying the Street. As a consequence, the Bajaj Auto stock has declined 11 per cent over the last three months —it has just managed to track broader markets (Sensex) in contrast to its significant outperformance over the last one year. Analysts say given domestic worries, the success of recent launches is critical for reversing the trend of slowing sales. What will help the company, however, given its large export base, is a depreciating rupee. Emkay Global analysts, Chirag Shah and Siddhartha Bera, estimate a three per cent depreciation for the rupee against the dollar would increase Bajaj Auto’s FY13 EPS by five per cent.
| VOLUME, MARGIN PRESSURES | |||
| In Rs crore | Q4’ FY12 | FY12 | FY13E |
| Volumes (units) | 1,017,167 | 4,349,560 | 4,645,786 |
| % change y-o-y | 7.0 | 14.0 | 6.8 |
| Net sales | 4,791 | 20,137 | 21,604 |
| % change y-o-y | 11.0 | 19.0 | 7.3 |
| Ebitda | 972 | 4,001 | 4,221 |
| % change y-o-y | 13.0 | 18.0 | 5.5 |
| Ebitda (%) | 20.29 | 19.87 | 19.54 |
| Change y-o-y (bps) | 30 | -5 | -33 |
| Adjusted PAT | 759 | 3,095 | 3,275 |
| % change y-o-y | 12.0 | 18.0 | 5.8 |
| P/E (x) | – | 15.1 | 14.0 |
| E: Estimates Source: Company, analyst reports | |||
At the current price, the stock is trading at about 14 times its FY13 estimates, which is lower than its long-term forward P/E average of 15 times. While the valuations are attractive, investors should await clarity on the success of new launches and export volumes over the next quarter.
Two-wheeler makers have lined up a slew of launches in the current financial year. Recently, Bajaj Auto launched the Pulsar 200 NS and New Discover (125cc) bikes. The company has a target of launching a new Pulsar, which enjoys premium positioning, every year. Its competitors, Hero MotoCorp, TVS and Suzuki have also lined up new launches in the form of the Ignitor (125cc), Victor (125cc) and Hayate (110cc), respectively. Given the focus of Honda, which recently launched the 110cc Dream Yuga, and Suzuki in the mass segment, sales of Discover could take a hit.
Moreover, Bajaj Auto has underperformed its peers on the domestic motorcycle volume growth front since the September quarter. While growth in earlier quarters was in single digits, in the March 2012 quarter it was flat. Even for FY12, while the domestic motorcycle sector grew 12 per cent Bajaj Auto managed only six per cent. In this backdrop, analysts have estimated a growth of 1-3.5 per cent for FY13 for Bajaj Auto as against six to seven per cent for the domestic motorcycle industry.
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Given the worries on the growth front, the success of new launches thus, becomes crucial. This is especially so in the entry and mid-level segments, which are likely to see intense competition due to Honda’s new launches. However, Nomura analysts Kapil Singh and Nishit Jalan believe Bajaj’s presence in the three-wheeler segment and contribution of higher exports will mean that only 50 per cent of revenues and 40 per cent of Ebitda are accounted for by the domestic motorcycle segment. Analysts feel Hero MotoCorp is likely to be impacted more than Bajaj Auto, given the latter’s exposure to the premium segment as compared to its larger peer. While exports contribute 33 per cent to overall volumes, the premium segment accounts for 30 per cent, feel analysts. To that extent, there is some cushion for Bajaj.
Changing product mix
Bajaj Auto’s economy bike, Platina, has been doing well, recording a growth of 39 per cent year-on-year in FY12, while premium bike sales (like the Pulsar) declined 10 per cent, said Macquarie Research in a note last month. Higher sales of the Platina, wherein margins are relatively lower, put a cap on margins. However, thanks to Platina, the company’s market share in the economy segment is estimated to be up 700-800 basis points year-on-year to 32 per cent in FY12. Going ahead, Emkay’s Shah and Bera believe the situation will improve for the company, driven by new launches in the executive and premium segments.