Bajaj Auto’s diversified product portfolio of commercial vehicles and two-wheelers gives it an edge when the domestic two-wheeler market is wobbling. Photo: Bloomberg
Bajaj Auto Ltd’s September quarter results added to the buzz created by Hero MotoCorp Ltd’s stellar performance. Both results point to better days ahead for two-wheeler companies, mainly on the profitability front. A highlight of Bajaj Auto’s result was its operating profit margin of 21.6%, up by 150 basis points over a year ago. More importantly, this figure surpassed Bloomberg’s consensus estimate of 20.9% for the quarter.
The company’s results’ storyboard contained elements similar to that of Hero MotoCorp. A mix of softer raw material costs and a favourable product mix helped margins improve. Realizations rose by 2.2% and made up for flat volumes. Therefore, net revenue inched up by 2.3% from a year ago to Rs.6,097.8 crore, which in turn was a tad higher than the Street’s forecast.
Bajaj Auto’s operating profit rose by 10.3% to Rs.1,371.1 crore, also higher than Bloomberg’s consensus. This was the second best performance in the company’s history. Bajaj Auto’s adjusted net profit (adjusted for previous period’s exceptional expense with respect to payment for the National Calamity Contingency Duty) was flat over a year ago, due to higher tax liability. Though Hero MotoCorp’s profit growth too was in single digits, it was higher at 9%. Bajaj Auto’s reported net profit was 57.9% higher at Rs.933.1 crore.
While both the performances of both the companies appear to be on the same page, here’s why Bajaj Auto may have an edge in the near term. Its diversified product portfolio of commercial vehicles and two-wheelers gives it an edge when the domestic two-wheeler market is wobbling.
Bajaj Auto has strong market shares in the segments it operates in: 40% market share in three broad motorcycle segments—mileage, sports and super sports. It also has a 48% share in the commercial vehicles business, which is also an important contributor to profitability. Hero MotoCorp’s stronghold is largely motorcycles, which has taken a back seat in the domestic auto market growth statistics.
And that’s not all. Exports account for nearly half of Bajaj Auto’s revenue. For Hero, this is relatively new terrain, as it has ventured here only in the past few years, after it severed ties with its Japanese partner, Honda.
Analysts are optimistic about the performance of Bajaj Auto’s launches in the festive season, which could add to the domestic share. A few quarters ago, Bajaj Auto’s market share had slipped for the want of new product launches.
All these factors point to brighter near-term prospects for Bajaj Auto when compared with Hero MotoCorp. Its share too reflected this sentiment, closing 3.3% higher at Rs.2,518.3 on Wednesday. At the current price, the stock trades at a fair valuation of around 20 times its estimated fiscal 2016 earnings per share.