Bajaj Auto's Q4FY19 results (Underperformer) - Inline quarters; outlook remains clouded

Q4FY19 results

• Operating performance inline: Bajaj Auto’s reported Q4FY19 PAT at Rs 13.1 bn (up 21% yoy) was ahead of our estimates largely on account of one-offs. However, the operating performance performance was broadly inline with expectations with slightly higher realisations offsetting lower than estimated margins. 
• Revenues ahead; margins weak: Revenues at Rs 73.9bn (up 9% yoy) was 3% with realisations rising 5% qoq on the back of a better product mix and ABS/CBS linked price hikes. However, EBITDA margins at 15.7% (flat qoq, down 380bps qoq) were impacted by higher other expenses (up 50bps qoq) on account of specific promotional advertisement expenditures. This offset a sequential in decline in raw material costs (partially on lower commodity prices). On the whole absolute EBITDA at Rs11.6bn (down 12% yoy) was on expected lines. The PAT benefitted from a Rs3.42bn reversal in legal provisions for  the NCCD (a national calamity fund). Adjusted PAT at Rs10.5bn (down 2% yoy) met expectations.  
• Concall Highlights: (a) The management did not provide a specific guidance for volume growth as the industry remained volatile (April retail volumes were weak). It does expect BJAUT to grow faster than the industry. We note that in Q3FY19 the management had indicated double digit growth for the industry (b) The margins are likely to remain in the current range bound – this could be an indication of the company’s continued focus on marketshare over profitability. (c) While in the past year the company has made marketshare gains on the back of price cuts, the management expects incremental gains to come from its new product launches – the management plans to target the executive segment with a new product (however, no new brand will be launched) (d) Exports in Africa remain strong on the back of an increase in crude oil prices; however there is weakness in certain export markets (notable Sri Lanka and Egypt).

Key positives: Higher than expected realisations

Key negatives: Higher other expenses

Impact on earnings: We broadly maintain our estimates for FY20/21.

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 continue to outweigh benefits from volume growth. We believe price cut led marketshares may have run their course and volume growth could be more sedate in FY20.  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 Rs2583 (15xFY21E EPS).