Despite domestc market troubles, Bajaj Auto remains a good long-term bet

Though Bajaj Auto's domestic sales volume came down by 24 per cent in the third quarter of 2013-14 on a year-on-year (YoY) basis due to stress in the domestic economy, the company mitigated the pain by increasing its export volume by 12 per cent. The company recorded its highest ever export volume in December. The momentum in export growth is likely to continue in the coming months as the company is gaining market share in Africa and Latin America.

While the overall sales volume came down by 12 per cent, Bajaj Auto's revenue for the quarter was down 5 per cent only. Its domestic realisation rose 7 per cent YoY due to price increases, while its export realisation was up 10 per cent due to the rupee's fall. With the management maintaining a tight control on expenditure, its EBITDA and adjusted net profit for the quarter showed a small y-o-y increase.

Despite Bajaj Auto's scorching export growth, the stock has been underperforming the Sensex due to the weakness in domestic sales. The stock market is also disappointed as Bajaj Auto is losing market share in the domestic motorcycle segment to Honda Motorcycle and Scooter India. Its domestic problems may continue in the short term.

However, the company is expected to recover some of its lost market share in the medium term with its new launches, such as KTM Sports Mode, Bajaj Pulsar 200 Ns Abs, among others. With the rural demand also picking up due to the good monsoon and the consequent rise in agricultural production, the company is expected to show a decent revenue growth in the coming quarters.

Despite its difficulties in the domestic market, the company maintained its margins due to the management's focus on profitable growth. Its return ratios and cash flow are among the best in the industry. Its margins are expected to remain stable in the coming quarters due to its widening reach in export markets and its strong focus on profitable growth.

The stock's valuation has improved after the recent correction in its price, which makes it a good long-term investment bet. At the current market price of Rs 1,908, the stock is trading at 13.7 times its estimated 2014-15 earnings per share, which is significantly lower than its historical average of 17 times.

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