Bajaj Auto will pass on duty drawback cut to customers

The government recently reduced the export duty drawback rates on motorcycles, three-wheelers and medium and heavy commercial vehicles to 2% from 5.5%.

Duty drawback rates are essentially refund of duties paid on imported inputs for products that will be exported.

Bajaj said the duty drawback cut will not materially impact margins.  However, he feels that Chinese competitors are at a significant cost advantage.

"We have no choice but to pass on most of this...this is less about pricing, this is more about bottom-line of companies and our approach has always been to profit ahead of sales," he told CNBC-TV18.

Bajaj's rival TVS Motor had also said earlier today, that the company may increase prices in the international market .

Bajaj Auto's exports took a hit in the last several months, following a sharp rise in duties by Sri Lanka and political turmoil in Egypt, two strong markets for the company. Bajaj said most of these issues were now behind it and so were set to raise prices before any other issues cropped up.

Sales of two-wheelers have also hit speed bumps in the domestic market in the last few months, and companies are banking on the festive season of Dassera-Diwali for a turnaround.

Bajaj, for instance, expects 30% higher volumes this festive season.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee.

Q: Did this move surprise you or was it on the anvil and you expected it?

A: It would not be fair to say that we are surprised because last year, when the reduction took place of a similar figure, it was said that this is not the end of it. This will be reviewed again in future. So, I wouldn’t say it is bolt out of the blue. But, at the same time, I think execution could have been better managed.

Q: Have you worked out what the impact could be? Since you have the largest exposure to exports from the two wheeler space, would you be able to pass down most of this impact or do you think it might have some impact on your margins?

A: I think our approach will be the same as it was last year. We have no choice, but to pass on most of this. Last year, all said and done, it is not so much about price competitiveness at the frontend because we are either competing with the Chinese who are much cheaper than us and the last 3% doesn’t really change anything or with the Japanese who are often a little more expensive.

This is less about pricing. This is more about bottom-line of companies. Our approach has always been to profit ahead of sales. After we made the increase last year, there was some tempering in the export growth. But one doesn’t know because that may have happened any ways. So, I don’t think we would like to gamble on that. We will pass on the increase.

Q: I only asked because you faced some difficulties in the export market and they are just beginning to even out. Is this is a good time to press ahead with price increases to even out this impact?

A: I don’t think there is any time which is a good time to pass on a price increase. But all the upheavals, which we have faced in the last few months, have to do with political or social issues in respective markets; many of which are thankfully behind us. So, before something else comes up, we better rush and pass it on.

Q: So no impact on margins at all?

A: No, we would pass on almost all of it. So, I don’t expect any material impact. I would not be able to comment today about the last 01-0.2 percent, but I think we would like to protect our margins.

Q: How is the festive season opening up? We have been getting some sluggish numbers from the two-wheeler space, but off late there is some optimism that this festive season may not be too bad. Have you seen any uptick that makes you more optimistic about this Diwali?

A: We have seen some positive signals whether it was out of Kerala or Maharashtra for Ganapati, little of what we are seeing from the East. Right now, we are in the middle of what is called Pitru Paksha. So, it is hard to tell. But we did see some uptick.

I think it is more for companies that have newer and better products in the market place. So, I am personally still holding on to my anticipation that through October and November, atleast Bajaj Auto should have volumes about 30% higher than what we have seen in recent months. That means closer to 260,000 -270,000 a month domestic motorcycles as apposed to the 200,000 rate we were going at.