Bajaj Auto: Growth back on track

Profit up 29%, aided by launches, better product mix, strong volume growth; road ahead looks good

After two lacklustre quarters, Bajaj Auto on Wednesday took the Street by surprise, especially on the revenue and operating fronts. On the back of 11.5 per cent year-on-year volume growth for the March quarter (Q4FY16), revenues at Rs 5,411 crore surged 10.6 per cent year-on-year, ahead of Bloomberg estimate of Rs 5,256 crore. But net profit at Rs 803 crore, which rose 29 per cent year-on-year, was in line with expectations despite an increase in tax outgo.

Bajaj Auto, which operates at highest margin in the two-wheeler segment, maintained its leadership on this front. Operating margins at 21.3 per cent rose over 160 basis points year-on-year, topping the Bloomberg estimate of 21.05 per cent, aided by higher realisations. A slew of new launches boosted volumes in FY16. Premium offerings such as Pulsar and Avenger closed Q4FY16 with market share of 50 per cent in the premium space.

While the premium segment is Bajaj Auto's strength, the company hasn't been successful in replicating its stronghold in the entry-level space. But with the introduction of CT and volumes of Platina holding strong, Bajaj Auto increased its market share in the entry-level segment from 23 per cent in FY15 to 35 per cent in FY16. Three-wheeler sales were up nine per cent in FY16, with Bajaj's market share up from 45 per cent in FY15 to 47 per cent in FY16.

S Ravikumar, president, business development, Bajaj Auto, sounded confident of replicating 20 per cent operating margins in FY17 and added that new launches would aid growth. Bajaj is targeting 17 per cent volume growth in FY17 (4.6 million units), of which three million units will come from domestic sales, led by new launches (Pulsar and Platina models) in FY17 and recently launched V15.

While the tall targets and robust Q4 financial performance took the stock of Bajaj Auto higher by 4.5 per cent on Wednesday, the question is, are these targets achievable as volume growth was flat at two per cent in FY16?

Prayesh Jain of IIFL says while sustaining operating margin may not difficult, export markets such as Nigeria and Egypt will continue to remain weak. "Therefore, much of the volume growth would depend on domestic market," he says. Domestic volumes were up 26 per cent in the March quarter. This gives hope.

Currently, the Bajaj Auto stock trades at 17.35 times its FY17 earnings and 28 out of 53 analysts polled (before financial results) on Bloomberg recommend buying the stock. Given the forecast, expect earnings upgrade.