Bajaj Auto

Dear Shareholder,
 
 In April 2008, hardly anyone could have predicted what the global
 economy would turn out to be by 31 March 2009. If you recall, we began
 the year with one of the world’s worst inflationary spirals since World
 War II. Today, it seems strange that in the first week of July 2008,
 the spot price of crude was quoting at above 4 per barrel, and
 pundits were talking of the imminent arrival of 0 oil. Nobody
 believed that the scourge of global inflation would suddenly disappear
 to make way for the worst economic downturn since the Great Depression.
 
 Yet, it happened with a vengeance since the second half of September
 2008, after the fall of Lehman Brothers. As I write this letter to you,
 the US, countries belonging to the European Union, the UK, Japan,
 Russia, China, India and others have already pumped in over .5
 trillion worth of funds and government guarantees to support their
 economies and financial systems; and the G20 has promised another .1
 trillion of support, including to the International Monetary Fund.
 
 While such concerted action has put an end to the severe liquidity
 crunch and instability across global financial institutions, the crisis
 has spread to the real economy. Consider the facts:
 
 - US GDP is expected to shrink by 2.7% in 2009. Its unemployment rate
 is at 8.5% (March 2009), and rising — the highest since the early
 1980s. Between October 2008 and March 2009, net payroll employment has
 shrunk by over 3.5 million.  And the job losses continue.
 
 - The Euro Zone’s GDP is likely to contract by 3.4% in 2009.
 Unemployment is already at 8.5%.
 
 - GDP of the UK is forecast to reduce by 3.5% in 2009.
 
 - Japan’s GDP will most likely contract by a massive 6.5% in 2009.
 Thanks to lower global demand, industrial production was down by a
 staggering 38% in February 2009.
 
 - China’s growth rate has crashed. From heady double-digit rates, GDP
 growth in 2009 is expected to be 6%.
 
 - And the World Trade Organisation estimates a shrinking of global
 trade by as much as 9% in 2009.
 
 Simply put, 2008-09 has been one of the worst years for the global
 economy. And 2009-10 is unlikely to be better. Indeed, most experts
 believe that the real turnaround will occur only in calendar 2010 —
 probably from the April-June quarter.
 
 India has not been immune to these tumultuous times. After three
 consecutive years of over 9% GDP growth in 2005-06, 2006-07 and
 2007-08, quarterly growth rates have steadily fallen from the second
 half of 2007-08. GDP growth for 2008-09 is expected at somewhere
 between 6.5% and 7%, which would be some 200-250 basis points lower
 than the previous year. And the prospects are fairly grim for 2009-10,
 with estimates varying from a low of 5% to 6.5%.
 
 To be sure, we are better off compared to the OECD countries: we are
 growing, albeit at a lower rate; they are shrinking. Besides, we are
 better insulated from the global scenario with domestic demand
 comprising 68% of our GDP. Even so, these are difficult times. A fall
 in demand growth translates to lower order books; lower capacity
 utilisation; and severe pressure on prices. The relatively worse
 performance of most manufacturing and service sector companies in the
 third and fourth quarters of 2008-09 reflect this reality.
 
 The Indian automotive sector has been hit by the combined effect of a
 severe credit crunch and a fall in demand growth. The third quarter of
 2008-09 was particularly fierce. Average monthly sales of motorcycles
 in India fell by over 17% in Q3 2008-09 versus Q2 — from an average of
 524,939 units per month to 435,114.
 
 Your company has been affected by this downturn.
 
 - Net sales and other operating income fell by 2.6% to Rs.88.11 billion
 in 2008-09.
 
 - Operating EBITDA was Rs.12.02 billion. The company continued earning
 a double-digit operating EBITDA margin: at 13.6% of net sales and other
 operating income for 2008-09, rising to 15.2% margin for the fourth
 quarter.
 
 - Operating profit before tax (PBT) was Rs.8.46 billion, with an
 operating profit margin of 9.6% of net sales and other operating
 income.
 
 In a difficult year, there have been some positive news. The first is
 Bajaj Auto’s exports. During 2008-09, your company’s exports achieved
 an all-time high of 772,519 units of two- and three-wheelers —
 representing a growth of 25% over the previous year. The growth was
 driven by the export of two-wheelers, which increased by 31% over
 2007-08 to achieve sales of 633,463 units in 2008-09. Last year, too, I
 had expressed my satisfaction with our exports. Given the excellent
 performance for three successive years and the establishment of
 significant bridgeheads in many geographies, I feel confident that the
 company’s products will continue to do well in international markets.
 
 The second good development is that your company will be introducing
 upgraded Pulsar models in May 2009 and brand new models for the
 executive segment in the second quarter of 2009-10. With these, and the
 positive response to the XCD 135 cc which was introduced in February
 2009, I expect sales to recover in 2009-10 — not to the levels seen in
 2006-07, but better than most of 2008-09.
 
 I would add another heartening news. Despite the severe contraction in
 your company’s sales in 2008-09, it has been able to maintain healthy
 operating margins. Indeed, the fourth quarter saw a rise in the margin
 to 15.2% of net sales and other operating income. This has much to do
 with a better product mix, higher productivity and lower input costs. I
 wholeheartedly support the management focus on lower costs and greater
 profitability.
 
 The path ahead is going to be challenging — that of growing sales
 without eroding profit margins in an economy which will be witnessing a
 250 basis point drop in growth rates compared to the last four years.
 But I am confident that your company’s management will deliver superior
 results in 2009-10. The building blocks are in place. With easier
 credit conditions, we can achieve growth with better profits.
 
 My thanks to all employees of Bajaj Auto for their unstinting support,
 especially in hard times. And to you for being with us.
 
                                                         Rahul Bajaj
                                                            Chairman