Stock Review: BAJAJ AUTO

 

Bajaj Auto's results for the June 11 quarter were marginally lower than consensus estimates of ETIG and leading broking houses. However, the quarterly results have to be viewed in the background of a rather difficult operating environment for the broader 2-wheeler sector, in terms of rising auto finance rates and elevated commodityinput prices. Its operating profit margin declined nearly 90 basis points YoY to 19.1% in Q1 of FY11, at a time when its net sales rose 22.8% to . 4,777.3 crore. Pressure on its operating margins was again due to higher input costs though average realisation per vehicle sold improved 4.3% YoY in the quarter under review.

 
Bajaj Auto's operating margins are the highest in the two-wheeler industry. Its net profit also grew 20.5% YoY to . 711 crore in the first quarter. However, during FY11, the company's growth in net sales was 39.3% YoY, while operating margins were at 20.5%. Going forward, there is considerable uncertainty with regard to key raw material costs, like non-ferrous metals, steel and rubber based.
And while commodity inputs had shown signs of easing toward the end of the first quarter, but there is no clear pattern emerging in the short term.

Also, the Street is concerned whether the government export promotion scheme DEPB would be extended beyond September. This comes at a time when overseas sales were providing the growth momentum to Bajaj Auto. For instance, the company's total overseas vehicle sales in units grew 32% YoY in the first quarter, and it helped overall vehicle sales grow 18% YoY to 1.09 million units in the quarter under review.

Analysts say if this export promotion scheme is not extended, it could potentially hurt the company's operating margins, going forward. The stock fell 1.3% to . 1431 on Thursday. Bajaj Auto is also planning to shortly launch Boxer 150 cc motorcycle especially, for the booming rural markets and that should provide growth momentum in domestic sales, going forward. Bajaj Auto trades at a P/E of 12 times on a trailing four-quarter basis and we are neutral on the stock.