Bajaj Auto margin may dip further as company aims at more market share

ET Intelligence Group: Despite significant volume growth, the stock of Bajaj Auto has underperformed the benchmark Nifty 50 in the past three months due to lower profitability. The trend has continued in the December 2018 quarter wherein it reported 38 per cent yearon-year volume growth in the domestic motorcycles segment, largely due to the 54 per cent growth in the economy-class models led by lower price of the CT100 bike. CT100 accounted for 14.4 per cent of the total volume in the quarter compared with 10.2 per cent in the corresponding quarter a year ago.

Margin pressure may continue given the company’s focus on gaining market share. The company has maintained its target of 24 per cent market share in the next two-three years from current 20 per cent.

The company, however, is gradually lowering the extent of discounts in the economy-segment by increasing the proportion of the Platina 110 model over CT100. These steps may limit the reduction in profitability.


The other factors that affected the margin were lower dollar realisation on export revenue and reduced share of the high-margin threewheeler segment. Analysts expect the company to report a 16 per cent operating margin before depreciation (EBITDA margin) for the current and the next fiscal.

Tapering volume of the high-margin three-wheeler business is also a concern. The company expects to sell one lakh units in the March 2019 quarter, lower than 1.1 lakh units in the year-ago quarter.

The domestic three-wheeler volume fell by 17.3 per cent to 91,000 units in the December 2018 quarter.

In addition, the three-wheelers export scenario remains challenging due to import restriction in Egypt, a major market for Bajaj Auto. The street expects 0.5 per cent and 5 per cent growth in the domestic and export markets, respectively, for the three-wheeler segment for the next fiscal.

At Thursday’s closing price of Rs 2,553.4, the stock traded at 15.6 times 12-month projected earnings. It is at 10 per cent discount to the five-year average, reflecting the effect of margin dilution and moderating two-wheeler demand.