Bajaj Auto Q1: See EBITDA at 19.1%, says Centrum Broking

Bajaj Auto will declare its first quarter numbers today. In an interview to CNBC-TV18, Ajay Shethiya, auto analyst at Centrum Broking speaks about his expectations from the company.

Also read: What to expect from Bajaj Auto Q1 earnings

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.

Q: What are your expectations from Bajaj Auto? What kind of price target are you working with right now on the stock?

A: Bajaj Auto, we are expecting the overall EBITDA margins to come at 19.1%. There is slight pressure on the EBITDA margins on a sequential basis largely on account of unfavorable product mix where the contribution from premium segment is slightly on the lower side, as far as the motor cycle portfolio is concerned. Also, there has been a lower contribution from the three-wheeler space. So, that would put pressure on the EBITDA margins.

Also, unlike Hero Motocorp, which had taken price increase to the extent of Rs 500-1,000 during the quarter, Bajaj Auto has not taken that price increase. So, net-net, we foresee margin pressure to continue for Bajaj.

Q: What kind of margin pressure do you expect to see sub 19%, closer to 18% kind of margins?

A: Not really 18%. But we are looking in the range of 19.1-19.5%. So, my own estimate stands at 19.1% to be precise.

Q: Do you expect Hero Moto to do better tomorrow?

A: Within the two-wheeler space, definitely we expect Hero MotoCorp to do much better as compared to Bajaj largely driven by the fact that they have taken a price increase to the extent of Rs 500-1,000 during the quarter. Though our interaction with dealers indicate that Bajaj Auto would go in for a price increase, but I think there is something which has not been confirmed yet by the management. So, relatively, within the two companies in the two-wheeler space, we definitely expect better results coming through from Hero MotoCorp.

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Q: Two-wheelers have been through a rough cycle before. What is your primary concern here, that they get into some kind of pricing war and margin begins to suffer or do you think the whole mindset has to be changed in terms of the kind of volume growth they can now do over the next couple of quarters?

A: In the two-wheeler space, over the last 17 years, the industry has seen a CAGR (Compound Annual Growth Rate) growth of 10-12%. The only year where the motorcycle segment had seen a drop was in 2008. That was largely on account of the external factors where the ICICI Bank completely got out from the financing. Since Bajaj was neck to neck with Hero MotoCorp, they started 0% finance scheme and also other guys started giving lot of incentives and there was an increase in the subvention cost. So, effectively what it did is it impacted the profitability for most of the two-wheeler players.

But since 2008 the whole scenario has changed and you have seen a more stable pricing scenario working out for the two-wheeler space. So, personally I don’t see the OEMs (original equipment manufacturers) going in for aggressive price war. Also, though HMSI (Honda Motorcycle and Scooter India) is getting quite aggressive, back of our calculations indicate that they would move from 8% market share currently to around 12% market share by FY13 and around 16% by FY14. So that is something which in the medium-term would not impact Hero MotoCorp.

So, net-net, I don’t foresee that a) the competition from Honda would significantly change the industry dynamics and b) the pricing scenario would remain stable. We continue to expect 10-12% growth coming through in the two-wheeler space because there is more resilience in the downturn as compared to passenger vehicles and commercial vehicles.

Q: What did you make of the last set of global sales from Tata Motors?

A: Though it was slightly lower as compared to what market was building, it came at around 28,615. But our interaction with the management indicates that the retail sales have been quite strong and have come at 31,000. That is quite encouraging. Also, it indicates that there is no significant pile-up in terms of inventory and the attraction continues in both Jaguar and Land Rover.

Also, the recent launch, Evoque, continues to do quite well. They have done 9,000 units for this month as compared to 8,500 units for the last two months. So, pretty much the volume traction is in place for JLR.