Bajaj Auto: Domestic boom revs up growth

The December 2009 quarter was among the best in more than two years which saw volumes rise 64 per cent to 809,000 vehicles.

Bajaj Auto is reaping the dividends of the India demographic paradigm as sales have leaped ahead, debunking all apprehensions of lower rural spend because of a deficient monsoon.

After a rough patch in second half of 2008-09 and early this fiscal, volume growth has started to look up. The December 2009 quarter was amongst its best in more than two years and saw total volumes rise by a strong 64 per cent to 809,000 vehicles, aided by Discover 100cc which was launched around August 2009.

For the quarter, Bajaj’s domestic bike sales were up 19 per cent sequentially and about 72 per cent year-on-year. Exports which have been under pressure given the global slowdown also surprised, ticking up 22 per cent over last quarter.

The management indicated that while the African market continued its growth trajectory, other markets have also started looking up. However, the sharp jump in numbers is also partly due to the low base effect. For December 2008 quarter, total volumes (including 3-wheelers) had fallen 31 per cent year-on-year to 494,000 units.

The super two-wheeler ride powered the company to almost triple post-tax profits to Rs 475 crore in December quarter over last year as sales went up this quarter by about 55 per cent year-on-year to Rs 3,323 crore.

The leverage of its fixed costs on higher volumes propped operating margins to 22 per cent, a 60 basis points expansion over September 2009 quarter, even as inputs costs trended up. Improving demand also meant that the company could take the call of raising prices of Discover 100 cc and Platina (done recently), which should provide some cushion.

Going ahead, Bajaj Auto should clock in 25-30 per cent domestic volume growth for 2009-10 and about 26 per cent for 2010-11 even as the industry grows at about 14-15 per cent domestically, adjusting for the lower base, according to Kevin D’Sa, VP, Finance, Bajaj Auto.

The company, which currently has a 27 per cent market share, is aiming for the 34-35 per cent share it enjoyed a few years ago.

A lot of these expectations are hinged around the performance of its upcoming launches and the recently launched Pulsar 135 priced at around Rs 55,000.

The company is looking to expand its Discover offerings which is targeted at the commuter segment and D’Sa, observes that he expects the over Rs 40,000 segment will show higher growth than the others.

The spate of new launches means that the current high operating margins may be difficult to sustain as sales and promotional expenses trend up.

Firm metal prices and change in product-mix (higher share of sub-125 cc bikes) may also affect margins going ahead. With Q4 being seasonally slower than Q3, margins are expected to stay in the range of 19-21 per cent and average over 20 per cent for 2009-10.

The industry has seen an inflexion and analysts are raining earnings upgrades with Bajaj Auto seeing 8 in the current month (6 post results). At Rs 1,703.95, the stock trades at 14 times its consensus (upgraded) analyst’ 2010-11 EPS estimate of Rs 121.09.

The stock has had a great run with a return of nearly 300 per cent in the last one year and continued strong numbers in the March 2010 quarter could be a trigger with adverse forex movements and any surges in raw materials being the downside risks.