Bajaj Auto: Three cheers

Unless volumes pick up and the firm gains market share, the stock won’t get re-rated.

A better product mix with a bigger contribution from higher-margin three wheelers, higher sales of 125cc bikes and some savings in raw materials and labour costs helped Bajaj Auto beat the Street’s margin estimates for the December 2008 quarter. The Pune-based firm posted an operating profit margin of 14.6 per cent down just 10 basis points y-o-y on revenues of Rs 2,103 crore which were lower by 16 per cent y-o-y.

The stock rallied 7 per cent on Friday to close at Rs 468, suggesting that the valuation gap with peer Hero Honda may narrow somewhat. However, a re-rating of the stock can only happen when there are clear indications that the company is gaining market share. Unfortunately, the company’s track record of new launches in the last two years has been rather mixed with the XCD not taking off as expected.

Although, the number of vehicles sold by Bajaj in the December 2008 quarter dropped by 31 per cent, the revenues fell just 16 per cent. That’s because three-wheelers accounted for a larger proportion of the vehicles produced—15.5 per cent compared with just 10.4 per cent in the corresponding period of 2007. With volumes up 3 per cent y-o-y, analysts estimate they would have fetched roughly 35-40 per cent of the company’s sales.

And that would have made a big difference to the profitability because three wheelers are believed to have operating margins in the region 20-25 per cent. Bajaj Auto also sold more 125 cc bikes, which again are more profitable than the smaller 100 cc bikes. A 220 basis points saving in the raw materials bill and a 10 per cent saving in the wage bill also helped push up the margins. The operating margins could remain at these levels with the full impact of lower steel prices filtering through in the March 2008 quarter.

However, it’s a tough environment in which even Hero Honda’s volumes are slipping. So, it won’t be easy for Bajaj Auto. In the nine months to December 2008, revenues for the company were flat y-o-y at Rs 6,927 crore while net profits fell 17.5 per cent to Rs 524 crore.