Bajaj Auto faces challenges in Q1, but it’s a rocky road ahead

In its first quarter earnings call held Wednesday morning, Bajaj Auto The company said its domestic business was the worst hit due to the crisis, which resulted in reduction in channel stock and hence reduction in retail market share.

But this meant a higher contribution from the export business which enjoys higher margins. This coupled with price increases and favorable exchange rates resulted in a 17% year-on-year increase in net realization per vehicle and 5% sequentially. 85,739 in Q1. This translated into gross profit per vehicle 23,856, a multi-quarter high.

However, Ebitda (earnings before interest, taxes, depreciation and amortization) margin shrank by 90 basis points (bps) sequentially to 16.2% due to operating leverage. One basis point is 0.01%. Bajaj Auto was hit by higher commodity prices, especially in the first half of the quarter.

Still, EBITDA margin was slightly ahead of analysts’ estimates. For example, analysts at Motilal Oswal Financial Services had estimated the measure to be 15.7%.

Going forward, the company expects the positive impact of softening metals prices to be visible in Q2. But the cost of energy continues to rise, which is a major concern. The company expects physical inflation to be around 1-1.5% of sales in Q2, down from 3% of sales in Q1.

On the demand front, the company sees an improvement in the situation. The demand environment in urban and semi-urban areas is currently better than in rural areas. Demand in rural areas is likely to improve with the monsoon picking up pace.

With respect to certain export markets, management sees weak macros due to dollar unavailability and inflation. Analysts at Reliance Securities said in an earlier cut note, “We expect volatility in its export business amid slowdown in certain geographies. The loss of stake is expected.” For Bajaj Auto in domestic and overseas.

According to the company, in the short term, supply lags behind demand. The chip shortage situation is likely to ease as Bajaj Auto has new suppliers. It further added that May was the worst affected while the coming months are sequentially better. Their primary focus in Q2 will be on getting inventory back to normal levels.

Meanwhile, shares of Bajaj Auto have gained only 1% in the past one year as opposed to a 21% rise in the Nifty Auto index. Recovering its lost market share amidst intensely competitive environment in the premium segment will be a major trigger for the stock.

first article