Bajaj Auto’s declining Ebitda margins worry analysts

Even as an aggressive pricing strategy led by price cuts by Bajaj Auto has helped in gaining significant market share (560 bps) in the economy segment in Q3FY19, analysts are concerned over the company’s declining Ebitda margins and have trimmed the estimates for the next two years.

Following a decline of 370 bps in Ebitda margins at 15.6% in the October-December quarter, analysts at Jefferies have trimmed the Ebitda estimates for the next two years by 5-8%. “We cut Ebitda estimates over FY19-21E by 5-8% mainly to reflect weaker gross margins,” they wrote.

Bajaj Auto’s gross margin declined by 440 bps y-o-y in Q3, primarily due to price cuts in the domestic motorcycle market and increase in commodity costs. The share of raw materials to total revenue increased by 500 bps in Q3 compared to the cost in the corresponding quarter last year.

Analysts at Kotak Institutional Equities said, “We remain concerned on the company’s declining EBITDA margins due to an aggressive pricing strategy and weakening franchise in the domestic motorcycle market. We have cut FY2019-21E EPS estimates by 4% due to cut in our EBITDA margin assumptions at 15.5% in FY20-21E.” They further wrote that in the CT100 and Platina segment, Bajaj Auto is making negative 10% Ebitda margin. Bajaj Auto executive director Rakesh Sharma said that the reduction in margins was because of the forex impact and the change in product mix driven by huge growth in the African market, and also because of lower commercial vehicle volumes. During Q1FY19, Bajaj Auto adapted aggressive pricing strategy wherein it cut prices of its entry-level bikes like the CT and Platina by Rs 3,000-3,500 in a bid to increase its market share in the segment. That led to a market share increase from 31.8% in Q1 to 37.4% in Q3 in the economy segment, but hit the margins by 370 basis points during the quarter.

However, the management has indicated that the negative pricing action could be offset by margin of its premium segment.

The company’s volumes are likely to continue growing as price cuts will further help in garnering volumes. “We expect Bajaj Auto to gain 280 bps market share in the domestic motorcycle industry over the next three years,” analysts at Kotak said in their report.

The company’s volumes grew 38% y-o-y in the domestic motorcycle segment aided by 54% y-o-y growth in the economy segment. In the premium segment, volumes rose 33% y-o-y in Q3FY19.

The Pune-based company on Wednesday reported a 16% year-on-year increase in its standalone net profit at Rs 1,101.9 crore during the October-December period, above analysts’ expectations. Revenues during the period also grew 16% at Rs 7,409.4 crore.