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Last Updated : Oct 28, 2016 04:38 PM IST | Source: CNBC-TV18

Mkt was expecting Bajaj Auto's profits to jump 10-12%: Expert

Speaking to CNBC-TV18 Pranoy Kurian, IDBI Capital Markets, said that the topline is a positive surprise. If revenues declined only 1 percent it means there is positive movement in realisation.


Two-wheeler manufacturer Bajaj Auto has reported a 6.7 percent growth in second quarter profit at Rs 1,122 crore on yearly basis, largely driven by other income. Revenue during the quarter increased only 0.4 percent to Rs 6,432 crore due to tepid sales volume growth while revenue excluding excise duty fell to Rs 6,054 crore from Rs 6,079 crore YoY. Bajaj Auto sold 10.3 lakh units in Q2FY17, registering a 2.3 percent degrowth compared with 10.56 lakh units sold in Q2FY16, hit by big fall in export markets like Nigeria and Egypt.

Speaking to CNBC-TV18 Pranoy Kurian, IDBI Capital Markets, said that the topline is a positive surprise. If revenues declined only 1 percent it means there is positive movement in realisation. Which would have been a surprise given the mix was far weaker, he said.

There was lower share of exports and three-wheelers. On the profitability front, the market was expecting a jump of 10-12 percent on the back of other income. They had forecast margins of 20.6 percent.

Prakash Diwan said that what seems to be working is that demand pickup takes away the competitive intensity felt in the June quarter.

Below is the verbatim transcript of Pranoy Kurian and Prakash Diwan's interview to Sonia Shenoy on CNBC-TV18.

Q: On the topline and the bottomline it seems like an absolute flat performance inline with estimates. Topline is up just 0.4 percent not grown at all. The bottomline is up just 6 percent versus an expectation of 9 percent jump. While we calculate the margins what would your initial comment be on the topline and bototmline?

Kurian: The topline would be a positive surprise because volumes were down 2 percent, we already knew that 2.3 percent but realisations being flat, the revenue declined only 1 percent then that means there is some positive moment in realisations, which would have been a surprise given that the mix was far weaker this quarter, a lower share of exports, lower share of three-wheelers, so on the topline that is a positive.

On the profitability front, the market was expecting a jump of around 10-12 percent mainly on the back of other income because of the new accounting standards. That has fall in so we will have to see at least whether the margins were lower than expected.

Q: What were you forecasting in terms of margins this time around?

Kurian: 20.6 percent, on earnings before interest, tax, depreciation and amortization (EBITDA) of Rs 1,221 crore.

Q: They have come in at Rs 1,294 crore. What I have done this time is I have removed the excise duty from the number and if you calculate that the margins have come in at 21.3 percent. So 21.3 percent is not bad at all and Rs 1,294 crore is the absolute EBITDA number stripped of excise duty and 21.3 percent is the margin so that is not bad?

Kurian: It is positive and what happening is across the sector, there are strong margin beats you have seen -- mainly it is due to the strong operating leverage, so other expenses and staff cost must have been lower the share of sales if I have to guess. We have to remember this quarter has a favourable base effect of Diwali being earlier, so there is a lot of high wholesale growth, sales to dealers, whereas the retail growth is lower. It has been a positive quarter but there is a strong base effect, this is likely to reverse in Q3.

Q: How would you read into these numbers?

Diwan: Very clearly, what seems to have supported the Hero Motocorp numbers as the margins have peaked out seems to be a industry wide trend and Bajaj Auto also has been helped by the fact that they had very limited advertisement and production (A&P) cost this particular quarter. There is not much of campaigning that they have done.

What seems to be now working for them is that the demand pick up probably takes away the competitive intensity, which was earlier felt in the April-June quarter. So, more or less, you are seeing a situation of comfort, which very clearly, the numbers at least depict. Going forward they will continue to ride on this operating leverage.

My expectation is of course, Hero is far more ahead of Bajaj but Bajaj also has not been disappointed by any upsets on the export market front. So, all in all, much better than what I had thought of. I was expecting slight weakness but they have probably managed to scrape through with decent set of numbers.

Q: But that is the thing, they are just managing to scrape through while other companies like TVS Motor and Hero MotoCorp are reporting good quarters or reporting a beat quarter after quarter. Do you think that hereon, there is a chance that Bajaj Auto could underperform Hero MotoCorp purely because of the struggle that they are seeing in the export market?

Diwan: What has happened is last year when the export started struggling in particularly the markets where the currency devaluation also has been hitting them badly, realisations weakened because of that specially Africa and sub-Saharan market they have taken a new focus itself. They wanted to be an export oriented company till the early 2015. Now they are looking at the domestic markets. So, naturally you are competing against the Heros and the Hondas. What has happened on the TVS numbers is that they have started seeing market share gains. Bajaj will have to do something very dramatically different to come back to the bounce if they have to be in the top two. So, very clearly they are not yet out of that zone and they will continue to struggle and they could underperform, there is no doubt about that.

For full discussion, watch accompanying videos...



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First Published on Oct 28, 2016 01:55 pm
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