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Bajaj Auto: risks loom to earnings growth

LiveMint logoLiveMint 21-07-2017 Vatsala Kamat

Bajaj Auto Ltd’s June quarter performance was a huge letdown for investors. The firm did badly on all counts except for other income that gave a leg-up to the quarter’s net profit.

Its 17.2% operating margin was not only 323 basis points lower than the year-ago period, it was a huge 270 basis points lower than the toned-down estimates at Bloomberg. Analysts had factored an impact of 100-150 basis points on account of hefty discounts offered to clear the pre-GST (goods and services tax) stocks with dealers. About Rs32 crore spent towards this in the June quarter was reflected as “exceptional item”. A basis point is 0.01%.

But then, a host of other factors too dragged down the two-wheeler maker’s profitability. Higher raw material prices hit gross margins. Further, the fiscal incentives at its Pantnagar plant that accounts for a significant part of its sales expired from the June quarter.

What’s worrisome is that Bajaj Auto’s operating margin has fallen way below the 20% mean that it maintained over the last three years amid various challenges. The company’s management is confident that the numbers will add up again from the third quarter, when the GST-led pressures on margins ease.

However, there is little reason for investors to have confidence in the company’s prospects. Bajaj Auto has been losing mileage on both home turf and exports. June quarter sales, although an aberration due to GST, were 11% down year-on-year. Domestic sales plunged harder than peers by 23% year-on-year. Fortunately, some price hikes lifted revenue, which at Rs5,442 crore was 5% lower year-on-year but in line with the Street’s forecast.

That’s not all. An Edelweiss Research report says that while Bajaj Auto has its stronghold in the 150-250cc motorcycle segment, its share in the overall two-wheeler market is steadily declining. Analysts point to the weak line-up of new products for the falling market share, given the aggressive marketing strategies of competitors like Honda Motorcycle and Scooter India Pvt. Ltd and Hero MotoCorp Ltd. Also, its absence in scooters— the fastest growing segment of two-wheelers—is weighing on growth prospects. Three-wheeler sales, too, have taken a hit on the exports front.

The odds weigh heavily against earnings growth in the near term. The June quarter’s reported earnings per share beat Bloomberg’s forecast by Re1. However, this also included a huge jump in income from investments during the quarter.

No wonder the stock has been underperforming the benchmark indices since the beginning of FY18. It weakened further after its March quarter results missed forecasts and continues to be range-bound since then. According to Bharat Gianani, analyst (auto and auto ancillaries) at Sharekhan Ltd, Bajaj Auto is likely to underperform the domestic two-wheeler industry given the absence of new launches and stiff competition. Exports recovery is uncertain too.

At Rs2,818.65, the Bajaj Auto stock discounts FY19 earnings estimates by about 18 times. Considering the odds, that is rich.

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