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There's no doubt that net profit is a key measure of a company's performance, but at times, it isn't the most important factor in a company's quarterly report card. In the fourth quarter, Bajaj Auto's bottom line has been driven by a lower tax rate and higher other income. The 26 per cent tax rate was lower than the estimates of 29 per cent, which drove the 10 per cent profit beat, says Emkay Global. Consequently, the company's net profit did not suffer, even though volumes for the quarter fell 3.5 per cent year-on-year and 13 per cent sequentially. Though Bajaj Auto managed to marginally beat consensus estimates on net profit, the stock fell 0.7 per cent.
However, what came as a negative surprise was the 200-basis-point decline in the operating margin, compared to last year. Core operating margins falling to 17.6 per cent could trigger a round of downgrades. Though cost of raw materials as a percentage of sales fell 60 basis points sequentially to 71.8 per cent, other expenses increased 110 basis points sequentially and 60 basis points annually to seven per cent of sales. Apart from this, employee costs, too, have moved up to 3.5 per cent as a percentage of sales from 2.9 per cent in the third quarter and 2.6 per cent in the corresponding period last year. Evidently, higher expenses have hurt profitability. If this rise in expense is a one-off thing, it's not a cause of concern, but if this is a recurring expenditure, then it would be. Mitul Shah of Karvy says it is important to understand the reason behind the increase in expenses. Apart from higher expenses, the company's realisations in export markets have also come down due to a change in export mix. Realisation in the domestic market, however, increased 5.8 per cent sequentially.
The Street is largely neutral on auto stocks after the recent rally as volumes are only expected to pick up in the second half of this fiscal. While most analysts expect Bajaj Auto's two-wheeler volumes to grow six-seven per cent in the domestic market and 10 per cent in the export market this year, analysts are awaiting the management to indicate how it expects things would move. According to Sharekhan, the company's strategy of entering new markets would help improve export volumes. After the fourth quarter disappointment on margins and volumes, analysts are reworking their volume and margin estimates. Emkay Global says it has a 'Reduce' rating on the stock and would look at a slight downgrade in volume/margin estimates.
