We have turned positive on Bajaj Auto, considering the strong tailwinds in domestic three-wheeler market and the improved performance in export markets.
After enduring a bumpy ride briefly at the start of FY18, Bajaj Auto managed turn around its performance for the year, as is evident from its earnings for the March quarter.
The company reported a significant rise in volume and revenue, and an expansion in operating profit margin. Most domestic challenges pertaining to demonetisation and the rollout of Goods and Services Tax are now behind it, and the end of Permit Raj in the three-wheeler segment has resulted in volumes surging.
The company's financials have also been bolstered by its performance in export markets. We have turned positive on Bajaj Auto, considering the strong tailwinds in domestic three-wheeler market and the improved performance in export markets.
Quarter in numbers:
The company's operating revenue grew 38.3 percent year on year, riding on the 32.6 percent growth in volumes and a 4.2 percent increase in realisations.
Average realisation increased on the back of a better product mix and the increase in product prices, which the company did to pass on the rise in raw material cost to the end consumer.
Three-wheelers and exports firing on all cylinders
Bajaj Auto has done well in terms of volume growth, on the back of a strong show in the three-wheeler segment and a stabilising export market. However, it continues to face challenges in the domestic motorcycle space.
For the quarter under review, the company registered a year-on-year volume growth of 32.7 percent, helped by a 144.3 percent rise in volumes of three-wheelers, and a 31.3 percent rise in export volumes.
The company's domestic motorcycle business grew 20.3 percent year on year for the reporting quarter, driven by strong demand for motorcycles in general.
For the fiscal year ended March, Bajaj Auto's volumes grew 9.3 percent on year. What disappointed us was the 1.3 percent fall in motorcycle volumes. Volumes of three-wheelers are exports grew 46 percent and 17.8 percent, respectively.
Maintained operating performance
Despite the rise in raw material cost, the company was able to expand its earnings before interest, tax, depreciation and amortisation (EBITDA) margin by 92 basis points (bps) in Q4 FY18, when compared to the same quarter last year. This was primarily due to a hike in prices announced by the company, and lower staff and other expenses as a percentage of net sales. Bajaj Auto's management indicated that the industry usually passes on the rise in raw material cost and is confident of continuing to do so.
Key growth drivers:Domestic motorcycle segment
Investors have been worried about the company's position in the domestic market and its significant loss of market share. However, the company reported a robust performance in the motorcycle segment for the quarter under review and expects to outperform the industry, going forward.End of 'Permit Raj'
The management continues to be optimistic about the three-wheeler segment, given the end of 'Permit Raj' in Maharashtra. The company believes that most of the benefit it has seen due to this has come from Mumbai, and that it is yet to start reaping the benefits from the rest the state.
The company's management expects Delhi, Telangana, Andhra Pradesh and Karnataka to be permit free, which would boost three-wheeler volumes, going forward. Bajaj Auto is already a market leader in the segment.
The mandatory move to four stroke engines and the ban of diesel engines are also seen boosting its three-wheeler volumes.Focus on new markets
Bajaj Auto generates more than 40 percent of its volume from export markets. The company continues to focus on identifying new markets for its products and this seems to be working well. In FY18, new markets contributed 14 percent of the company's total sales volume, as against 10 percent in FY17.
Most export markets appear to have stabilised now. The management said that motorcycle exports grew on the back of a strong recovery in Nigeria, a focus on the sports segment in Latin America, especially Argentina, and new product launches in Philippines and Malaysia. The commercial vehicle segment grew on the back of a recovery in Egypt and other new markets.
The management clearly indicated that it would continue to focus on export and new markets, and said it expects to sell 1.9 million units in export markets in FY19, up from 1.6 million units sold this past fiscal year.Focus on 125 cc and aboveBajaj Auto's management indicated that there is a lot of competition in the entry-level segment (100/110 cc), which is highly commoditised and gives no pricing power to the company.
In light of this, the company has decided to focus on the 125 cc-and-above segment, where customers are willing to pay some premium, thereby leaving some pricing power in the hands of the company.
Further a valuation perspective, Bajaj Auto's stock is trading in something of a comfort zone. It is currently trading at 17.8 times and 15.6 times its estimated earnings for FY19 and FY20.
Moneycontrol Research page.