Bajaj Auto’s 3QFY16 results were marginally better than our expectations due to higher-than-expected EBITDA margin (by 40bps). The EBITDA outperformance coupled with lower-than-expected tax rates, resulted in adjusted PAT narrowly beating our estimates (by 4%). The company indicated that some markets are facing payment issues resulting in non-availability of US$ for imports which has impacted the company’s despatches to export markets (primarily Egypt and Nigeria).
We expect increasing competition from Royal Enfield, TVS and Honda to impact market share in the highly lucrative premium segment (loss of 100bps over FY16-FY18 in continuation of the 750bps loss over FY12-FY15). Macro/political issues and increasing difficulty in share gains in export markets to restrict export volume growth to 11% over FY16-FY18. Furthermore, INR depreciation benefits would be limited by significant devaluation in local currencies/price cuts. We will wait for further clarity on the 3QFY16 performance and the management’s outlook at the conference call before changing our estimates. While Bajaj trades close (14.8x) to historical multiples, subdued earnings growth are likely to weigh on the share price.
Total revenues (after reclassifying R1,159 mn from ‘non-operating income’ to ‘operating income’ for a like-to-like comparison with the earlier reporting format) declined 1% YoY and 8% QoQ. Revenues exceeded our estimates by 2% owing to better-than-expected sales realisation. Average net realisation/vehicle expanded 1% QoQ and surprised our estimates driven by higher export realisation.
Raw material costs as a percentage of revenues declined 203bps YoY and 32bps QoQ to 65.8% and were 42bps lower than our expectation. As a result, gross margin was 42bps higher than our estimates. The gross margin outperformance coupled with lower-than-expected ‘employee expenses’ (increased 16bps QoQ and was 10bps lower than our expectation) led to EBITDA margin of 21.8%, increasing 97bps YoY, and was 40bps higher than our expectation. Absolute EBITDA was 4% higher than our estimates.
The ‘other income’ (after reclassifying R1,159mn from ‘non-operating income’ to ‘operating income’) was 16% lower than our expectation. The EBITDA outperformance was offset to some extent by lower-than-expected other income resulting in PBT coming in 3% ahead of our expectation. The tax rate during the quarter came in lower-than-expected at 32.0% (versus our expectation of 33.0%) leading to PAT beating our estimates by 4%. On the balance sheet front, the company reported net cash and cash equivalents of R94.3bn as at end-December 2015 vs R96.7bn as at end-September 2015.
Where do we go from here?
Bajaj Auto’s 3QFY16 results were marginally ahead of our expectations primarily on account of higher-than-expected export sales realisation. During the quarter, the average realisation for exports was R66.0/USD vs R65.2/USD in 2QFY16.
On Bajaj’s domestic motorcycle volumes, we remain concerned of the industry demand, rising competition and scooterisation. Domestic motorcycle industry volumes declined 2% YoY in 9MFY16, driven by weak demand trends, particularly in rural areas. We expect the industry’s near-term growth to remain subdued (2% in FY16).
On the market share front, Bajaj’s market share has remained constant in 3QFY16 at 17.9% (vs 17.8% in 1HFY16). However, Bajaj has lost 861bps market share in its core and highly profitable premium bike segment over FY12-YTDFY16 to Royal Enfield, Yamaha and TVSM. While Bajaj will launch new Pulsars (including 400cc variants) over the next 1-2 years, the expanding Royal Enfield capacities and competitive launches (from TVSM, Honda) are likely to result in further market share losses to the tune of 100bps over FY16 to FY18 in this segment. Absence of
scooters will add to the overall market share loss in domestic 2Ws (ex-mopeds) (33bps) over
Overall, we expect Bajaj Auto to post volume CAGR of 9% over FY16-FY18E in the domestic motorcycle segment. In exports, 3QFY16 2W and 3W exports declined 16% YoY, clocking 410k units (137k units/month), lower than the 166k units per month in 1HFY16, driven by macro headwinds (fall in crude oil prices, foreign exchange availability and political issues) in key geographies such as Africa, Latin America and Nepal. With such macro/political issues persisting, strong market share already having been reached across most export markets and rising competition in exports from players like TVSM, we factor in much lower 11% CAGR in FY16-FY18 export volumes (15% over FY10-FY15).
We will await greater clarity on the 3QFY16 performance and the management outlook from the conference call in the coming days before making any changes to our estimates.
The stock is trading at 16.0x FY17E net earnings. We retain SELL.