Stock Review: BAJAJ AUTO

Bajaj Auto's results for the March quarter of FY11 were broadly in line with analysts' expectations. The operating environment has remained adverse due to rising input costs and the inability to fully pass them on. The company's operating margin declined 230 basis points YoY to 20.7% in the fourth quarter, despite net sales that improved 23.5% to . 4,200 crore.

Pressure on operating margins was due to its adjusted raw material costs that rose nearly 220 basis points YoY to 68% in the quarter under review, and it offset the 5.4% improvement in average realisations per unit sold. Its core net profit (excluding exceptional items) after tax grew 16.9% YoY in the quarter under review.

The fourth quarter for Bajaj Auto also saw the slowest growth in net sales and core net profit on a YoY basis, compared with the first three quarters of FY 11. This took place at a time when the company's total twoand three-wheeler sales in the fourth quarter grew 17% YoY, considerably slower than that reported in the first nine months of FY 11.

However, taking into account exceptional items like surplus on pre-payment of sales tax, deferred liability, Bajaj Auto's net profit jumped 164.8% YoY to . 1,400.4 crore in the quarter. The stock however, declined 1.7% to . 1,286.7 on Wednesday.

Earlier, Hero Honda's operating profit margin declined 190 basis points YoY to 15.4% in the fourth quarter. To the credit of Bajaj Auto, its focus on higher margins motor-cycle brands like Discover and Pulsar, coupled with its three wheelers repertoire have helped it to deal considerably better vis-à-vis its nearest rival with regard to rising input costs during FY 11. Hence, Bajaj Auto's operating margins during the year ended March 11 have also been considerably superior to its nearest rival.

Going forward, key input costs for the auto sector are expected to broadly flatten in the short term at a time when the commodity cycle has shown some signs of weakness.
This should help ease some of the pressure on operating margins for Bajaj Auto over the next few quarters, say analysts. However, auto finance rates are on an upward bias and it has raised fears of sluggish growth in two and threewheeler sales for the broader sector, going forward.