Despite tailwinds, margins to remain under pressure for Bajaj Auto

Rising exports, price hike, improving mix not enough to offset costs

Led by robust growth in volumes, higher realisations, and cost-control efforts, Bajaj Auto’s March quarter operational performance was in line with Street expectations. Its volume growth of 18 per cent YoY was largely due to the 24 per cent jump in export sales, even as the domestic market was struggling to keep pace.
 
While both commercial vehicles (three-wheelers) and motorcycles contributed to growth in exports, sales growth in the domestic segment was confined to motorcycles. Given the fall in intra-city transport since the start of the pandemic, commercial vehicle sales remain in a downward trajectory; sales fell 38 per cent in Q4. Given the trend of stronger exports, sales to overseas markets now account for 52 per cent of sales, as compared to 47 per cent in FY20.
 

While the company is circumspect about the near term prospects in the domestic market, given curfews and lost sales as the wedding season remains muted, it expects export momentum to continue. Growth across geographies is led by a faster recovery than the home market, with the depreciating rupee being an additional tailwind.
 
The other metric the Street will look for is margin trend in light of the superior performance of TVS Motor. The operating profit margin at 17.7 per cent was slightly lower than what the Street had pegged as price hikes and lower other expenses were able to partially offset the rising input costs. Commodity costs will weigh on the portfolio even in the June quarter as the 4 per cent hike in the last four months is not enough to overcome the 7 per cent cost surge. In addition to a weaker rupee, premiumisation of the portfolio (sales of higher capacity bikes) and recovery in three-wheeler (high margin product) volumes are expected to support overall profitability.   
 
The stock was down 1.4 per cent after the results announcement, given the near-term pressure on profitability. While the new policy linking dividends with cash levels is positive and should support the stock, valuations at 18x its FY23 earnings estimates means little upside for the investor from these levels.