Bajaj Auto Cruises Through Subdued Q3FY13

Yesterday (Jan 16, 2013), Bajaj Auto (BAL) announced its results for the quarter ending Dec 31, 2012. The results were in line with expectations. In a challenging environment, BAL managed to perform better than the industry and its peers. For Q3FY13, its total sales volumes grew by 4.86% YoY as compared to those of Hero Motors (-1.02%) and TVS Motor (-2.11%).

The revenues for BAL grew by 8.56% in Q3FY13 as compared to Q3FY12 to touch Rs 5412.71 crore. The EBITDA grew by 2.81% to Rs 1011.75 crore and the net profit by 2.96% to Rs 818.74 crore. Although there was an increase in revenues, the margins were pressured. The operating profit margin came down by 105 basis points to 18.69% and the net profit margin was down 82 basis points to 15.13%. The net profit margin took a long-term hit in this quarter, resulting from the end to tax benefits at its Patnagar, Uttarakhand plant. Moreover, the amount pending with the Maharashtra state government for VAT has increased in this quarter, further affecting the company’s bottomline.

A sluggish environment, both globally and domestically has resulted in a subdued atmosphere for companies in the sector to operate in. Post the results announcement, Rajiv Bajaj, MD, BAL, said that the company might miss its targeted sales volume of 5 million units for FY13. It is likely to sell only around 4.3 million units, which translates into flat growth as compared to FY12.

The domestic performance of BAL was strong in Q3FY13, with sales growing by 8.21%. However, the export volumes dragged overall growth, having declined by 1.23% YoY. Exports account to nearly 35% of the total volumes and to more than 30%of the total sales. The performance of this segment, thus, holds high importance for the overall performance of BAL. Although there has been a reduction in duty drawback rates, it has managed to offset this with price increases and has been able to successfully pass on about 80% of that reduction, thus making up financially even with a moderation in volumes.

Overall, BAL has performed better than its peers. Although the macroeconomic environment continues to be subdued and the likelihood of a turnaround directly linked with an improvement in the overall sentiment, the management has a better outlook for CY13 than FY12. Having looked at the company’s relative outperformance, its resilience and expectations of a better outlook in FY14, we recommend investors to buy stocks of BAL on dips. Its product positioning and revenue mix make for a healthy strategy that can translate into strong gains over the long term.