Bajaj Auto in slow lane as domestic volumes fall 12%

Higher share of low-margin bikes in overall volumes erodes margins by 200 basis points sequentially

Slowdown continues to bite India's automobile majors. Even the festive season has failed to give a leg-up to Bajaj Auto's third quarter numbers. The company reported an annual decline in volumes, revenue and net profit.

While the fall in sales has been driven by a double-digit decline in total volumes, an adverse product mix has hit net profit. Despite a weak operational performance, the firm has beaten the Street's estimates on net profit growth, thanks to a forex gain of Rs 96 crore. Adjusted for these gains, Bajaj Auto's net profit reflects a fall of 1.2 per cent to Rs 809 crore, compared to last year, says Yaresh Kothari of Angel Broking.

During the December quarter, the two-wheeler maker reported a five per cent fall in revenue, as volumes contracted 12 per cent to 993,690 units. However, exports came to the rescue, growing by 12 per cent to 401,030 units, while domestic volumes fell 24 per cent to 560,300 units.

Like sales, profitability, too, has been hit. During the quarter, the share of premium motorcycles has gone down, while that of low-margin ones has risen. The share of the economy segment has increased both sequentially and annually to 21 per cent in the third quarter, while the share of premium bikes to overall volumes has dropped from 37 per cent in the second quarter to 28.8 per cent in the third quarter.

This is why adjusted operating margins have declined 200 basis points sequentially to 20.3 per cent. On a year-on-year basis, operating margins rose 157 basis points, largely due to foreign currency fluctuations. The rise in raw material costs, too, impacted overall profitability.

Deepak Jain of PhillipCapital says the disappointment in margins was largely due to raw material costs, which rose 250 basis points sequentially. This seems to reflect higher-than-expected increase in commodity costs as well as a deterioration in the product mix.

Analysts expect the domestic market to remain sluggish. However, export volumes may continue to support the company's performance in the coming quarters. Analysts expect the firm to report strong growth in Africa and Latin America. Poor to negative growth in the domestic market would continue to drag profitability.