Bajaj Auto margins under pressure, net profit grows 3.6%

Bajaj Auto on Wednesday reported a 3.6% year-on-year (y-o-y) increase in standalone net profits at Rs 1,152.5 crore in the July-September quarter on the back of higher revenues and other income. The motorcycles manufacturer reported a strong 22% y-o-y increase in its revenue at Rs 7,987 crore, driven by strong volume growth. However, the Bajaj Auto stock crashed to a 28-month low, losing 4.3% on the Bombay Stock Exchange (BSE) to close at Rs 2,475.30.

The Pune-headquartered company’s operating margins were under pressure and fell 280 bps y-o-y to 18%. The margins were impacted by a sharp 27% increase in the cost of raw materials – the share of raw materials to total revenue increased by 295 bps y-o-y. The increase in total expenses for the quarter was 26% y-o-y at Rs 6,716 crore. In Q1FY19, Bajaj Auto cut prices of its entry-level bikes like CT and Platina by Rs 3,000-3,500 in a bid to increase its market share in the entry-level bike segment.

While the aggressive pricing strategy helped Bajaj to increase its market share by 170 bps in Q1FY19 q-o-q and by 400 bps in Q1FY19 sequentially, this has been putting pressure on the company’s margins. Analysts with Jefferies observe that although Bajaj Auto reported volume growth in Q2, margin will be key given its aggressive pricing strategy. Price of Bajaj CT has been increased by Rs 1.3k in September but it is still below the March 2018 price level. Bajaj Auto sold a total of 6,92,899 units in Q2FY19, up 19% y-o-y. The company’s market share in the domestic motorcycle segment stood at 18.6% against 16.9% in Q2FY18.

Bajaj Auto Limited