Bajaj Auto: FY13 volume guidance looks ambitious

Price hikes in the domestic market should prevent further margin erosions

Even if a company fails to meet the Street’s expectations, management commentary on opportunities and risks ahead can go a long way in assuaging concerns. That’s exactly what Bajaj Auto’s top brass has done after the Q1 numbers came in below estimates. The company has outlined a road map that would help improve volumes for the rest of the year. So, after falling 2.43 per cent on Tuesday, its shares jumped 5.2 per cent on the day it disappointed the Street with a volume contraction of 1.3 per cent year-on-year (up six per cent QoQ) to 1.08 million units and a three per cent YoY growth in revenues (five per cent QoQ) to Rs 4,866 crore.

Though sequentially the company’s volumes have grown, analysts are concerned about the 16 per cent volume decline in the executive segment of two-wheelers. The segment has grown three per cent for the industry. This decline has driven the overall underperformance on the volume front, as the sports segment has stayed flat, while the base segment has grown 34 per cent for Bajaj. The base category for the industry has grown by 22 per cent. This adverse product mix (lower share of premium segment and three-wheelers) resulted in lower realisations, explain analysts.

Deepak Jain, auto analyst at Sharekhan, says customers are downtrading and segments other than the base are not showing much growth. Going by Q1 numbers, he believes the company would not be able to clock volumes of five million and revenue growth of 15 per cent through FY13. Jain expects the company to close the year with 4.71 million units and revenue growth of 9.5 per cent.

Three-wheeler volumes, too, have seen deceleration due to imposition of higher duties in markets like Sri Lanka. Bajaj Auto’s three-wheeler volumes have contracted 26 per cent YoY in Q1FY13 to 96,348 units. However, the management has conveyed that three-wheelers, which command higher margins, will pick up from August. In order to prevent a decline in demand due to higher duties, the company has made price adjustments in select markets. Even in the domestic market, the company has undertaken price hikes in both the two- and three-wheeler segments.

Analysts believe this is the worst and from here things will improve, both on volume and margin fronts. Though operating margins declined 190 basis points QoQ to 17.9 per cent, analysts say eventually margins will settle around 18.5 per cent for the full year. The company is also confident of growing volumes both in India and export markets. This will improve the market mix.