Bajaj Auto sees encouraging signs of demand revival after tough Q1

Bajaj Auto Ltd’s weak financial performance for the June quarter reflected the steep fall in its sales. Nevertheless, the company is seeing initial signs of demand recovery in motorcycles, which is reassuring investors.

Revenue dropped 60% from the year-ago quarter, tracking the 64% fall in sales volumes. The 11.7% increase in realizations (or average selling price) reflected the BS-VI transition price hikes.

Still, the steep fall in sales volumes and in revenue impacted the June-quarter earnings. Operating profit slumped 68% from the year-ago quarter, while margins dropped 3.1 percentage points. Some analysts were expecting a steeper fall in the operating profit margin on lower operations. But the results are broadly in line with Street estimates.

The June quarter reflects the full impact of covid-19. Q4FY20 (January-March) was relatively better due to the enhanced product mix. The quarter had a greater share of higher profit-margin three-wheelers in sales. Comparatively, sales of three-wheelers were hit significantly in the June quarter.

With commuters avoiding shared mobility (rides in autos) during the current pandemic, the company sees slower recovery in this sub-segment. “Till normal activity resumes, commercial vehicles (three-wheelers) will continue to see much lower business,” the management told analysts.

On the positive side, the management is seeing faster recovery in motorcycles, both in India and in exports. Demand for motorcycles from mid-June to the first half of July recovered to 80-85% of last year, the management told analysts. “Compared to the previous year’s second half of June to now, demand has been swift in coming to normal levels; there are pockets (that are) doing well and some not (so) well,” said the management.This commentary will reassure investors. The slight recovery in sales volumes could help expand profit margins. While the stock has recovered significantly from its March lows and is now only 9% away from its 52-week highs, demand needs to persist.

Supply chains are constrained and production at Bajaj Auto has yet to fully recover to pre-covid-19 levels, though current demand and supply is largely balanced. “While we have restarted operations, sporadic localised lockdowns are disrupting the supply chain and impacting the ability of the business to return to normalcy,” Bajaj Auto said in a statement.

Rising coronavirus cases outside metros and the reimposition of restrictions on people’s movement and commercial establishments are hampering recovery. Recent channel checks and interactions with automobile industry dealers by analysts indicated a small easing of consumer enquiries in July. Also, it is not yet clear how much of the recovery in sales is being driven by pent-up demand. A gradual demand pickup post covid-19 must be watched.