Bajaj Auto: Exports, currency fall drive profit beat

Better realisations in domestic market also help prop up operating margins

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

Mitul Shah of Karvy Stock Broking says: "The rupee depreciated by 20 per cent y-o-y, 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, although volumes declined during the quarter. While volumes declined eight per cent y-o-y, net realisations rose 13.6 per cent y-o-y and 7.3 per cent sequentially.

This implies 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 the product mix has improved. The share of three-wheelers has risen from 8.7 per cent in the corresponding quarter last year to 9.6 per cent in the second quarter of FY14. Higher realisations helped improve operating margins, too. The company's operating margins at 23.1 per cent is three times the average operating margins of the industry and 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 per cent against Bloomberg consensus estimates of 20.6 per cent. Lower input costs also helped gross margin expansion.

Currency gains may have driven this quarter's performance, but analysts believe the stock has 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.