Bajaj Auto's Q2FY19 results (Underperformer) - Weak operating performance

Q2FY19 results

• PAT in-line; Operating performance tad below expectations: Bajaj Auto’s Q2FY19 PAT at Rs 11.5 bn (up 4% yoy) was in-line with our estimates. A weaker operating performance due to rising raw material put pressure on EBITDA margins.
• Revenues in-line; Operating performance weak: Revenues at Rs 79.9bn (up 21% yoy) reflected the volume trend (up 25% yoy) while realizations continued to drop (-1.3% qoq) due to higher discounting in the economy segment as reflected in the strong volume growth (+50% v/s industry growth of 27% yoy). Export revenues were Rs 29.1 bn in 2QFY19 (+30% yoy). Currency realization in the export market was at 69.4/$ v.s 67.4/$ in 1QFY18. The EBITDA margins at 16.8% (-50 bps qoq) were ~40bp below our estimates. The disappointment was on account of 100 bps increase in RM costs while other costs declined marginally.
• Concall Highlights: (a) Management indicated festive season (Dussera) is not progressing as expected with industry motorcycle volumes in the range of -5% to 0%, while Bajaj Auto volumes have grown at a faster pace. It expects the company to record a 10-15% volume growth for the entire festive season (Dussera+Diwali).(b)It has taken a price increase of Rs500-1000 on 2Ws and Rs 1500-2000 for 3Ws in first week of October apart from price increases in 2QFY19.(c)It expects average USD realization of Rs73.5 in FY20(translates to Rs500 mn/monthly) while realization for 2HFY19 is expected to be Rs69.5.(d)It expects impact of incremental insurance costs to settle on demand within 3-4 months.(e) It expects EBITDA margins to be under pressure in 3QFY19 on festive season incentives.(f) Not much change in competitive intensity in the export markets apart from under-pricing from Indian peers.

Key negatives: Higher RM costs and lower realizations

Impact on earnings: We raise our FY19/20 estimates by ~4% on account of higher volume growth/potential currency benefits.

Valuations & view

The company’s strategy of cutting product prices in order to gain market share may benefit it over the longer term. However, in the near to medium term the dilution in margins are likely to outweigh benefits from volume growth. We also note that the strategy entails risking the equity of the company’s only strong brand, the Pulsar. With the risk of a potential slowdown in volumes due to regulatory price hikes (insurance/ABS/BSVI), we remain cautious on the space. Maintain Underperformer with a target price of Rs2370 (14xFY20E EPS).