It’s been a milestone quarter for Bajaj Auto. This outperformance is reflected in the share price, currently at a peak multiple of 16x FY14 earnings. Some analysts are wary that the valuations are not factoring in potential erosion in domestic market share. After Honda split from Hero in 2010, the automobile major has been gaining market share in the two-wheeler segment. This is prompting analysts to voice their concern on the prospects of other two-wheeler players like Hero MotoCorp and Bajaj Auto.
However, if one views Bajaj Auto’s performance in Q3 and factors in the potential uptick in FY14 earnings, the premium valuation seems justified. In Q3, revenues have grown 8.6 per cent year-on-year (y-o-y) to Rs 5,616 crore, driven by the five per cent y-o-y growth in volumes. In the domestic market, the company’s motorcycles volumes grew seven per cent, while industry volumes grew four per cent. Bajaj Auto’s management believes “exciting and differentiated products” helped address the current slowdown in domestic volumes.
Besides volumes, for Bajaj the average selling price is up 4.6 per cent annually and 2.5 per cent sequentially. The product mix has been positive, with the share of three-wheelers in overall sales moving up from nine per cent in Q1 to 12.5 per cent in Q3. The share of 125-250cc bikes has also moved up from 40.3 per cent in Q1 to 43.3 per cent in Q3. Both are high-margin products. While operating margins are down 100 basis points (bps) y-o-y, sequentially the company has improved margins by 30 bps to 20.1 per cent. However, net profit grew slightly below market expectations. Though export demand in most markets remained weak, Africa continued to do well, with Nigeria recording its highest ever retail sales in December 2012. Realisation in exports moved up eight per cent.
The outlook for FY14 is also good. Analysts expect Bajaj Auto to post a sharp uptick in earnings in FY14, as it has hedged most of its export earnings at Rs 54 a dollar. Emkay Global has a “reduce” recommendation on the stock, owing to rich valuations. In contrast, Hero trades at cheaper valuations, beginning 2015, when its royalty payment ends. However, Mitul Shah of Karvy believes Bajaj is trading at current multiples, as it is expected to do well operationally. He says: “Hero used to trade at 17x multiples during its heydays but now its valuations reflect operational issues, due to its over-dependence on an increasingly competitive domestic two-wheeler market. From a margin profile to diversified revenue mix, Bajaj is better placed than Hero, with decent presence in export market and having three-wheelers in portfolio.”