Bajaj Auto hinges on new launches, festive demand

Better-than-expected results on higher realisations and lower raw material costs

Bajaj Auto on Wednesday reported better-than-expected results on margins and net profit fronts. This helped the stock end the day with gains of 3.2 per cent. While volumes continue to be sluggish, the company managed to post 2.2 per cent growth in revenues due to higher realisations.

While the firm has taken a marginal price rise during the quarter, revenue growth is entirely due to better product mix. It sold more high-margin three-wheelers and premium bikes such as the Pulsars. Due to the rural slowdown, Hero MotoCorp’s volumes were down seven per cent, but higher realisations (price rise, product mix) helped limit the fall in overall revenues to a per cent.

Operating performance of automobile companies over the past two quarters has been good due to lower cost of raw materials. Bajaj Auto saw its raw material cost as a percentage of sales come down by 241 basis points (bps) to 66.4 per cent. A marginal uptick in revenues, too, helped improve the operating profit margins by 119 bps to 21.6 per cent — about 40 bps higher than the number estimated by analysts.

Adjusted net profit (excluding the foreign exchange gain) at Rs 927 crore was up four per cent year-on-year, compared with estimates of Rs 880 crore. Hero’s net profit was flattish at Rs 772 crore.

While Hero will look to improve market share on the back of launches of two new scooters — the Maestro Edge and the Duet — Bajaj Auto, too, has lined up a slew of products in this financial year. While the company will launch the new Avenger, its top-end premium bike shortly, it also plans to launch a middle-segment bike later in FY16. The issue of new three-wheeler permits in Maharashtra and the rest of the country is another key trigger as three-wheelers account for 14 per cent of volumes, but are more profitable, with margins at 25 per cent.

On the export front, the company could see some challenges on account of currency fluctuations. How demand moves in the export markets is key for Bajaj, as half its volumes come from abroad, while it is under five per cent for Hero. The worrying factor for both the companies is the muted demand, with slowdown in rural and urban markets. The managements of both the firms are hoping for an uptick from the coming festive season.