Bajaj Auto: Pricing pressure on exports

Better show in India will partly offset the export weakness

Bajaj Auto’s December quarter net profit at Rs 901 crore topped estimates of Rs 840 crore, due to higher Other Income, which jumped 110 per cent year-on-year to Rs 200 crore, and due to a 100-basis-point fall in effective tax rate to 30.5 per cent. The overall performance didn't excite, with exports being a drag. Had it not been for domestic sales, net sales would not have come on expected lines.

Weak export volumes hit revenue, which fell one per cent year-on-year to Rs 5,463 crore. Exports (43 per cent of volumes) were down 16 per cent year-on-year. This was partly offset by a 10 per cent growth in domestic volumes on the back of new launches. The Street will keep an eye out for export performance, as Nigeria, Colombia, Sri Lanka and Egypt, which account for over half of Bajaj's exports, are facing economic downturn or macro instability. January exports were down eight per cent year-on-year. For the first 10 months of 2015-16, exports were three per cent lower year-on-year.

A weak rupee against the dollar offsets some pressures, but a further fall in the currencies of these export destinations could pressure export volumes. Given the pressures in some export markets, Bajaj has cut its 2015-16 export forecast from two million units to 1.83 million units. Its stock ended 1.7 per cent lower over the previous close.

Exports are crucial as they are more profitable. Margins on exports are three to five per cent more than domestic products. Lower export component in the volume mix (43 per cent in the December quarter from 50 per cent in the year-ago quarter) and price cuts in key African markets led to a 65-basis-point year-on-year fall in operating profit margins to 21 per cent. The 200-basis-point fall in raw material costs as a percentage of sales helped partially offset this stress.

Positively, realisations on exports and domestic sales increased due to higher sales of Avenger and Pulsar, and a weaker rupee. Bajaj has been gaining share in the economy (CT100, Platina) and premium (Pulsar, Avenger) segments as new launches and refreshes have found good traction in the domestic market. With launch of the V-commuter bike, it would look at getting a better grip on the executive segment, where it has struggled to get its act together. The going will not be easy, as there is competition from established players Hero and Honda, and TVS has re-launched the Victor.