Bajaj Auto’s Pulsar bikes are still selling fast but its auto rickshaws aren’t— it may squeeze the margin
- The world's most valuable two-wheeler company Bajaj Auto is slated to report its third-quarterly earnings tomorrow.
- The top brokerages expect the company to lose margin as three-wheeler sales have been tepid in the Oct-Dec quarter.
- Meanwhile, the stock has jumped 28% since Sep-end and the market capitalization crossed the ₹1 trillion mark in Dec on the Indian stock exchanges.
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Analysts fear the margin may get squeezed by high raw material cost and the discounts offered in the last couple of months.
While the company may be more popular for its Pulsar model of motorbikes, Bajaj Auto makes a much bigger profit margin on every auto-rickshaw that it sells. The three wheeler sales haven’t recovered yet. “Volumes increased by 9% YoY primarily led by 26% YoY increase in export motorcycle volumes offset by 36% YoY decline in three-wheeler segment volumes,” noted the Axis Securities report.
AdvertisementTherefore, according to various brokerage reports, the automaker is slated to see at least 12% growth in its profit-after-tax.
Street’s view: Bajaj Auto Q3 expectations
Source: Brokerage reports
|Brokerage||Revenue Growth (estimate)||Profit Growth (estimate)|
Meanwhile, the share price of Bajaj Auto has risen nearly 28% since September 30, as the investors cheered robust sales growth during the quarter. The stock achieved a milestone in December after its market value crossed the ₹1 lakh crore ($14 billion) mark on the Indian stock exchanges.
Here’s what to expect from Bajaj Auto in Q3
While the three-wheeler continued to stay under pressure, Bajaj’s third quarter sales were 9% better than the same period last year. The analysts’ reports credit the year-end offers and the festive demand for the spike in revenue aside from the sharp jump in exports.
AdvertisementDiscounts eat into the margin, and input costs have risen too
The Axis Securities report highlighted that the gross margin is expected to be slightly lower than last year on account of inflationary pressures on input costs. The coronavirus came at a time when the automakers were already battling with new emission norms and passing on the high input cost during that period wasn’t an option for the already reeling industry.
According to a BP Wealth report, “earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is expected to get contracted by 110 bps due to higher input costs and limited pass on of BS-VI costs.”
Although the company did hike prices to offset the cost, it was too late for it to impact the earnings. The analysts believe that the margins may improve over the next quarter after the recent price hike. “Gradual pass-through of BS-VI costs and tight cost controls are expected to offset RM cost inflation and negative impact of removal of MEIS benefit,” said the Nirmal Bang preview report.
Exports to have a bigger share of the revenue pie this time
With its exports growing at a higher pace top brokerages remain optimistic about its growth trajectory. The company is witnessing a faster recovery in key international markets of Africa, Latin America and others. Being the largest exporter in the three-wheeler category, the company is deemed to grow, according to ICICI Securities report dated December 16.
Bajaj Auto has also been a beneficiary of rupee depreciation, with reported operating margins at industry-leading levels.
Here’s what the top brokerages recommend
Given all the positives around the brokerages remain Bullish on its stocks.
|Axis Securities||Target met||₹3500|
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