Bajaj Auto Q1 FY 2011-2012 result analysis

Bajaj Auto seems to have finally decided to play the volumes game. First quarter numbers show a distinct shift in Bajaj Auto’s product mix, which has eaten into the company’s operating margins. With the launch of Bajaj Discover 125 this April, analysts say the company is strengthening its presence in the very competitive executive segment, where margins are lower than the sporty one. No wonder, earnings before interest, taxes, depreciation and amortisation margin declined 150 basis points sequentially and 90 basis points year-on-year to 19.1 per cent. 
While Bajaj expects sales of the high-end Pulsar to pick up after college starts, the share of the premium bikes would decline. The premium segment (125-250cc) accounted for 52.8 per cent in the fourth quarter of FY11 and is down to 51 per cent in the first quarter of FY12. With the launch of the Boxer, an entry-level bike for the rural markets, the company’s share in the premium segment will come down further. This change in product mix has resulted in realisations declining 1.3 per cent in the first quarter, as margins are lower in the executive and entry segments.

Apart from lower realisations and deteriorating product mix, margins have also been impacted by higher raw material/sales ratio at 72.6 per cent (an increase of 170 basis points sequentially).
This ratio shows raw material prices have gone up and even though the company has undertaken price rises in April.

While some financial ratios seem to have deteriorated, but analysts are not yet worried. To combat the mounting pressures of rising costs and lower realisations, the company has started managing costs. Staff costs accounted for 3.1 per cent of sales in the fourth quarter of FY11, down to 2.9 per cent of sales in the first quarter of FY12. Analysts expect the company to clock 14 per cent in volumes this year. While operationally there are no issues, but a key downside risk could arise from the DEPB benefit withdrawal, as 30 per cent of sales are from exports.

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