Bajaj Auto Ltd will announce its December quarter (Q3FY22) results today. Last quarter, the company’s volumes shrank by nearly 10% year-on-year. This was primarily driven by a 12% fall in two-wheeler (2W) sales, which was partly offset by an 18% growth in total three-wheeler sales (3W).
Even so, strong exports and price hikes are expected to support marginal year-on-year revenue growth in Q3. Motilal Oswal Financial Services expects Bajaj Auto’s Q3 revenues to rise by 1% year on year. However, the drop in sales volume and higher commodity costs have kept expectations low on the Ebitda margin front. Ebitda is earnings before interest, tax, depreciation and amortization; a key measure of profitability. Motilal Oswal estimates Bajaj Auto’s Ebitda margin to contract by 510 basis points (bps) year-on-year to 14.3%. One basis point is one-hundredth of a percentage point.
According to BNP Paribas, guidance on 2W industry volumes for FY22 and FY23 (for domestic and export markets) and expectation of timeline for the revival of the domestic 2W and 3W market are among factors to watch out for in Bajaj Auto’s management commentary.
Other major listed two-wheeler companies are expected to show similar trends, with either a fall or minimal increase in revenue year-on-year accompanied by a drop in Ebitda margin. Overall, subdued festive demand, slow recovery in the rural economy, and weak consumer sentiment are expected to weigh on Q3 earnings of two-wheeler companies on a year-on-year basis. Sequentially, though, price hikes could aid margin recovery. In Q3, factors that played in favour of two-wheeler companies include growth in export markets and higher average selling prices. However, this was offset by weak domestic demand and increased raw material costs. Prices of major commodities such as aluminium, lead, and copper clocked highs during the quarter but prices of steel and precious metals declined sequentially.
For TVS Motor Co. Ltd, analysts at Kotak Institutional Equities expect Q3FY22 revenues to be similar to that of last year, thanks to price hikes. Note that TVS’ sales volume dropped 11% in Q3FY22 where a 12% fall in 2W volume was partly offset by 17% growth in 3W sales volumes. Like Bajaj Auto, TVS’ performance in the export market partly offset the effect of weak domestic demand, to that extent.
Hero MotoCorp Ltd is expected to be the worst performer among two-wheeler companies. “We expect revenues to decline by 22% year-on-year in 3QFY22 led by 30% year-on-year drop in volumes and 11% year-on-year increase in average selling prices," said Kotak’s analysts. The brokerage firm estimated Ebitda margin to contract by 340bps to 11.1% versus 14.5% in 3QFY21.
Kotak expects Eicher Motors Ltd’s (standalone business) revenue to rise by 2.6% year-on-year while Ebitda is estimated to drop by 6.6%. In Q3FY22, the company saw a 15% drop in its volume.
In a report on 18 January, BNP Paribas reckons, “We see EIM (Eicher Motors) and TVSL (TVS Motor) disappointing on margin due to commodity cost impact, de-inventorisation, and lower scale. With commodity prices easing, it should be interesting to hear companies’ outlook on margin." As 2W companies announce Q3 results, investors would do well to follow management commentary on the impact of the third covid wave, rural demand, and commodity costs.
Over the past year, shares of Bajaj Auto and Hero MotoCorp have meaningfully underperformed those of TVS Motor.
