Bajaj Auto’s higher-margin three-wheeler is not ‘out of the woods’ yet — will take a toll on second-quarter earnings

Oct 22, 2020, 09:10 IST

BCCL

Bajaj Auto will report its second-quarterly earnings today(October 22).
According to brokerages, the automaker is likely to see at least a 18% decline its profit.
Bajaj’s volumes declined over 10% year-on-year in the second quarter.

The demand in the auto sector has revived to near pre-COVID levels in this past quarter. The sales recovery has been led by the re-opening of the economy across various regions, sustained rural demand, and the inventory build-up ahead of the festive season. Bajaj Auto too has been a beneficiary, with the company witnessing a gradual sales recovery from the lows of the first quarter. But there may be some pain left in store for the company.

According to an IIFL report, “Bajaj may be hurt by adverse mix (weak 3W), withdrawal of MEIS export incentives, and an unfavourable USD-INR.”

Weak sales in August and July

While the 10% overall growth in September sales provide optimism for more recovery in the months to come, sales from July and August are likely to take a toll on its second quarter earnings.

It is worthy to note that the company sold 163% more vehicles in Q2, than to the previous quarter.

And, with over 10% volume decline year-on-year, analysts expect Bajaj Auto’s margins to remain under pressure as well. According to brokerages, the automaker is slated to see at least 18% decline in its profit-after-tax.

Brokerages on Bajaj Auto	Q2 profit estimates (YoY)
Emkay	-12%
HDFC Securities	-26%
IIFL Securities	-21%
BP Wealth	-18%
ICICI Securities	-14%

The pain point — Weak demand for its three-wheelers

Even as other segments in the auto sector have witnessed green shoots of recovery, the outlook for the commercial vehicle segment still remains pretty bleak. A ICICI Direct report highlighted that Bajaj’s “high margin 3-W category is still not out of the woods amidst Covid crises given the apprehensions over public transport and norms of social distancing.”

This was evident even in September sales figures. While Bajaj’s overall sales rose 10%, the commercial vehicle segment declined nearly 44%.

Capping of MEIS incentives may add to its woes.

The other overhang for Bajaj Auto earnings in July-September quarter will be the recent cap imposition by the government on incentives under the Merchandise Exports from India Scheme (MEIS) from September 1. Bajaj Auto is among the largest beneficiaries of the scheme. The company told Financial Express that it received upto ₹20 crore per month and got over ₹230 crore under the MEIS in FY20.

The festive season is fuelling hopes

With the arrival of the festive season, Bajaj Auto is also betting on a sharp rise in sales figures. “The initial market trends do suggest a bigger uptick during the festive season with people’s sentiment improving and the need for personal mobility becoming even more evident in Covid times,” said the Axis Securities report.