Bajaj Auto: exports & currency fall drive profit beat

Better realisations in domestic market also helped prop up operating margins which have risen 420 bps yoy

Bajaj Auto is the latest company to spring a positive surprise on the market with its second quarter numbers. The company's performance has been driven by exports, favourable product mix and improved realisations. Over the last few years, Bajaj Auto been tapping new export markets and the company is reaping benefits of this strategy. Even though overall volumes declined 8% in the second quarter compared to last year, gross turnover has gone up by 3%. Export revenues jumped 26% year-on-year to Rs 2,125 crore, even as export volumes grew merely by three% during the quarter. Now, exports account for 40% of the company's overall sales.

 

This quarter's export revenues have largely been driven by the rupee's fall. Mitul Shah of Karvy Stock Broking says: "The rupee depreciated by 20% year-on-year, which helped export revenue growth." Analysts expect the company's exports to continue to do well, as the company has been tapping new markets in Africa and Latin America.

 

While the currency has helped shore up export revenues, a better product mix and higher realisations have helped profitability in the domestic business even though volumes declined during the quarter. While volumes declined 8% year-on-year, net realisations rose 13.6% YoY and 7.3% sequentially.  

 

What this implies is that the product mix is improving with the share of three-wheelers and high-end bikes going up. Three wheelers are high margin products and an improvement in margin indicates that the product mix has improved. The share of 3-wheelers has risen from 8.7% in the corresponding quarter last year to 9.6% in the second quarter of FY14. Higher realisations helped improve operating margins too. The company's operating margins at 23.1% is nearly three times the average operating margins of the auto industry and nearly double the operating margins of the nearest competitor, claims Bajaj Auto. Even adjusted operating margins are ahead of the Street's estimates. Emkay Global says adjusted EBITDA margins for the quarter were ahead of estimate at 22.6% (+420 basis points YoY, +220 bps QoQ) against Bloomberg consensus estimates of 20.6%. Lower input costs also helped gross margin expansion.

 

Currency gains may have driven this quarter's performance, but analysts believe the stock is currently priced in all the gains. Also, domestic volumes are set to decline through the rest of the year, the festive season notwithstanding. Going by the growth in export volumes in the first half, analysts do not expect more than high single digit growth in export volumes. Analysts recommend booking profits in any post-result rally as the stock is fairly valued at this point.