Bajaj Auto: Growth moderating

Higher input costs bite as domestic market share slips despite healthy volume growth.

Bajaj Auto reported 27 per cent year-on-year growth in net sales to Rs 4,177 crore for the December quarter with realisation up eight per cent to over Rs 44,000 a vehicle. Strong Pulsar and Discover sales contributed to a favourable sales mix.

Volume growth at 17 per cent normalised from the 50 per cent levels seen earlier as base growth (third quarter of FY10) caught up. Sequentially, however, volumes dipped five per cent owing to dealer-level inventory build-up in the previous quarter.

Earnings before interest, taxes, depreciation and amortisation margins, at 20.3 per cent, were down 30 basis points (bps) sequentially (160 bps y-o-y) as input costs surged to 71.4 per cent of sales, up 70 basis points (bps). A sharp uptick in other income and a lower effective tax rate (with more production shifting to the Pantnagar plant) boosted the bottom line by 40 per cent to Rs 667 crore.

With volumes at 947,000, Bajaj inched closer to the one-million quarterly sales mark and expects to reach there in the next quarter. Domestic volumes increased 22.6 per cent but lagged industry growth. Its market share dipped 130 bps to 25.6 per cent (according to Pinc research), though exports clocked 8.3 per cent growth.

Bajaj is looking at volumes of 4.8 million vehicles in FY12 and expects to sustain margins at 20 per cent levels.

It aims to grab a higher market share with launch of a new Discover series and higher three-wheeler sales. It expects this to counter cost-side pressures. The small car project is on course for the 2012 launch, according to the management.

Alongside margin pressures, higher competition and rising interest rates are impacting Bajaj’s volume growth outlook, dampening expectations.

The stock is down 13 per cent in the last three months. It closed 1.75 per cent lower at Rs 1,296.8 on Thursday over its previous close and trades at a price to earning of 13x current consensus FY12 estimates.