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Bajaj Auto'Q2 FY19 gave mixed results. Topline continues to experience strong growth while the operating margin is down significantly. The operating margin was affected by unfavorable commodity prices (RM) and by management initiated price reduction in the entry-level motorcycle segment. The export market is doing extremely well for the company and has experienced strong growth in volume. We continue to appreciate our activity, given the depreciation of the rupee, the positive growth prospects of the export market, the strong demand for three-wheeled motor vehicles (3W) in India and reasonable valuations. .
Quarter in figures
On an annual basis, net operating revenues grew by 21.4% over very strong volume growth ( 25%). However, average achievement was down 2.9% year-over-year due to management pricing measures in the entry-level segment.
Volume: all segments turn on
In terms of volume performance, Bajaj Auto recorded an overall growth of 25% in volume, supported by a growth of 20.3% domestic market and 32.8% of exports.
In the domestic market, the motorcycle and 3W segments recorded growth of 18.6% and 31.6% year-on-year. , respectively. Motorcycle segment volumes increased as a result of base segment price declines and strong demand for mid-size and premium bikes. The 3W segment, on the other hand, continues to perform well thanks to the end of the Raj license.
The company achieved the highest monthly export volume ever recorded in September, mainly due to strong demand in Africa, Southeast Asia and the Middle East. .
Operational results were tainted by lower prices and higher prices in RM
In line with the new strategy of gaining market share in the motorcycle entry segment range, the management has decided to reduce its prices in this segment. This change, combined with the rise in commodity prices, had a negative impact on profit margin, before interest, taxes, depreciation and amortization (EBITDA), down 291.8 basis points (100 basis points = 1 percentage point) to 16.8%.
Work in favor of the company:
Concentration on market shares in the motorcycle segment of the country
Bajaj Auto has started to gain market share in the 2W segment . This is mainly due to the aggressive price strategy adopted by the company. Despite a moderate demand from the industry, the company recorded volume growth of 18.6% in the second quarter of fiscal 19. This led to a 170 basis point increase from overall national market, which is 18.6%. Management has achieved a 20% market share in the motorcycle segment by the end of fiscal year 19 and its long-term goal is 24%. Operating margin: Range of products, depreciation of the rupee to provide a respite
it has reached about 20% in recent quarters due to negative price measures taken by the company in the segment of bicycles entry level. Management stated that negative price measures existed only on 14% of total business and could be offset by the margin of its premium segment. In fact, management indicated that Platina was doing well in the beginner segment and was profitable for the company. In addition, strong traction on sports bikes and new launches on the premium segment would help improve margins.
The recent depreciation of the rupee is expected to improve the margin. Management indicated that it would be able to achieve more than 70 rupees per dollar in the third and fourth quarters and above Rs 73 per dollar from the first quarter of fiscal 2015, as against 69, 4 rupees per dollar in the second quarter of fiscal 19.
Absence of 3Ws fueled license regime
The global 3W market continues to strengthen after the end of the Raj license in Maharashtra and new licenses in Delhi. This led the company to record strong volume growth in the 3W segment. In fact, it recorded a 32% volume growth in the 3W segment.
In a recent announcement, the government abolished the 3W license regime, powered by an alternative fuel. This should bode well for the company, given its 86% market share in the market.
Given high demand expectations, the company planned to expand production capacity from 3W to 0.8 million units, from 1 W to 1965. Improving Exports
Exports seem to be stabilizing and should benefit Bajaj Auto, which generates more than 40% of its revenue overseas. In the second quarter, it recorded a 33% growth in export volume. Its market share in Africa is currently 45% and could reach 50% in the coming years.
Management announced that it would continue to focus on exports and new markets and guided its exports to 2 million units during fiscal year 19, instead of 1 , 6 million units sold during fiscal year 18.
Reasonable valuation Despite the general volatility of the market, the stock has been corrected by 29%, which makes its valuations reasonable. The company is currently trading 15 times and 13 times the projected profits for fiscal years 19 and 20 respectively.
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