Despite headwinds, Bajaj Auto delivers on the margin front in Sept quarter

Topics Bajaj Auto | Q2 results

Even as overall two wheeler sales for the quarter were down 2 per cent y-o-y, three wheeler sales are down 53 per cent
Despite lower volumes, Bajaj Auto’s September quarter operating performance was better than the Street’s estimates, on account of higher margins. 

Though volumes were down 10 per cent over the year-ago quarter and revenue fell 7 per cent, the company posted a 110-basis points (bps) operating profit margin expansion to 17.2 per cent in the second quarter. 

In the domestic two-wheeler segment, higher sales of premium vehicles were the biggest reason for the margin outperformance. 

The company highlighted that strong sales of the more profitable Pulsar franchise in the 125cc category helped it improve market share in this category to 16 per cent, compared to the year-ago levels of about 6 per cent. 

In addition to the highest-ever Pulsar sales — which are now at a third of overall volumes — sales of super-premium bikes from KTM and Husqvarna achieved their highest levels in the domestic market. Two-wheeler sales were also at elevated levels in the exports segment, led by Latin America (LatAm) and Africa, with higher sales of Pulsar and Dominar bikes in the LatAm market. 

The margin outperformance is also notable, given the restriction on the benefits under the Merchandise Exports from India Scheme as well as rising raw material costs. 

Further, the margin gains came in despite the collapse of three-wheeler sales (highest margin segment for Bajaj Auto) — both in the domestic as well as export markets.

Even as overall two-wheeler sales for the quarter were down 2 per cent year-on-year, three-wheeler sales are down 53 per cent. 

Finally, the company took calibrated price hikes in the entry-level portfolio, which enabled it to keep realisations higher.

While some of the gains in the quarter, such as lower marketing expenditure, will be reversed, the company believes that the structural shift to premium (Pulsar) segment should help it sustain domestic margins. 

However, a lot will depend on how the volume trend in the festival season turns out, with the company indicating that sales were at similar levels to last year’s. While the stock has improved from its lows six months ago, it has not moved much in the past three months. 

While the margin gains are impressive, investors should await a three-wheeler recovery and festival demand offtake before considering an investment.

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