Analysts concerned about Bajaj Auto profitability

Bajaj Auto may have reported a 39% year-on-year increase in its domestic sales in the three months to June, but analysts are concerned about the Pune-headquartered firm’s profitability, given it has triggered a price war.

The Bajaj Auto stock has lost 4% over the last one month and 9% over the last six months. The stock closed Tuesday’s trading session at Rs 2,727.55 on the BSE, down 0.24% over Monday’s close.

The company grew its market share in the motorcycle segment by 200 bps sequentially in the three months to June, taking it to 17%. It achieved this by cutting prices for entry-level bikes such as the CT 100 and offering discounts on lower variants of the Pulsar. Prices for the CT 100 were cut by `3,000 and that helped Bajaj Auto gain significant market share of 800 bps in economy segment.

However, profitability at the automaker was disappointing, analysts observed. The Ebitda (earnings before interest, tax, depreciation and amortisation) margin was down by 210 bps q-o-q. Kevin D’sa, president finance, Bajaj Auto, said that the strategy of cutting prices will continue for the next several quarters. “So yes, it will be Ebitda dilutive but for us it is very critical to gain market share,” D’sa told analysts over a conference call.

Analysts attributed this to a deterioration in the product mix and discounts in entry segment bikes, namely the CT 100 and Platina.

Analysts at Jefferies wrote the aggressive pricing led to a significant miss in revenues and margins. “Bajaj’s earnings disappointed as revenue and blended realisations was below our estimate. This is likely on account of unfavourable mix and aggressive pricing as there was strong growth in domestic entry segment motorcycles — CT 100 and Platina — which are in any case low margin products and where Bajaj has been further discounting to gain market share,” the analysts noted.

The CT 100 and Discover models compete with Hero MotoCorp’s HF Dawn and Splendor models. Analysts with Kotak Institutional Equities observed that given the CT100 and Platina segment form 15% of Bajaj Auto’s revenues, the company is losing money on this segment. “Such price cuts are not sustainable over the long term,” said the analysts.

Bajaj’s move to cut the prices in lower-margin economy bikes by `3,000-3,500 has not only affected its profitability but also affected Hero and TVS in their respective market shares in the economy segment. The company, however, indicated it would continue pursuing the market share by cutting prices for the CT 100 and Platina over the next two-three years. While the company expects to gain market share after the launch of the new Pulsar 150, significant price cuts for the CT 100, increase in Discover volumes, the analysts believe that it will only lead to marginal market share gain for the company’s domestic motorcycle segment.