Ending months of uncertainty Japanese auto maker Nissan had announced that it would not continue its partnership with Bajaj Auto for sourcing ultra-low cost cars (ULCC). In an interview with CNBC-TV18, Rajiv Bajaj, MD of Bajaj Auto said there is a lack of clarity on the launch of the ULCC project. However, the company is on track for the launch of the RE60 by the end of FY13. He is also confident of a 30% rise in October, November volumes.
However, September sales are likely to be slightly lower than August, added Bajaj. The company is also eyeing around 70,000 to 80,000 Pulsar sales in the festive season along with 1.5 lakh units Discover sales. Bajaj is also confident of staying within the 20% EBITDA margin zone this fiscal. He further stated that the two-wheeler industry is de-growing at a 10% rate every month.
Here is the edited transcript of the interview on CNBC-TV18
Q: Nissan has called off the ultra-low cost car. Is that now confirmed? You are off that project?
A: I have very little clarity on this and I will tell you why. First of all, I have not heard from either Nissan or Renault. There is no official feedback to us yet. We were promised some feedback after they had seen the vehicle at the auto expo, the RE60 that we showed there. But we haven't heard from them.
Secondly, the lead partner from our point of view on this project has always been Renault. Our first contact was with Renault in Paris, sometime in October 2007 and through all the discussions and the development it is Renault that has been the lead partner.
Nissan has kind of been hanging on the side. I am a little perplexed, because when I read about Nissan's lack of interest, I don't know how to interpret it. Does it mean that Renault is still interested? Does it mean that Renault is also not interested? Or does it mean that they are just both confused, I am confused as well.
Q: So you wouldn't reach out to them?
A: I am waiting to hear from them. It is not that we have not been in touch. We have been in touch from time to time. Every time we have been told that we are still discussing. We need some more time. We will come back to you. I don't mean that in any bad sense.
Quite frankly, the project was reoriented on November 8, 2009 when I met the Renault representative in Delhi and at that time it moved from being an ultra-low cost car which was more of a Nano-like concept than being a four wheeler like and which is what the RE60 is now.
In 2009, it was therefore decided that Bajaj would take the lead to design and develop this vehicle, because Bajaj was best placed according to Renault in terms of frugal engineering to develop such a concept. We have ventured to do that because I have always said that we have a very sharp focus for this project. This four wheeler is the ideal vehicle to upgrade all the people who are today having to use three wheelers, not only in India, but in so many markets across the world.
We export almost two-thirds of all the three-wheelers we make. For our business, it makes a lot of sense as a strategy to defend our leadership, to develop such a four wheeler. Therefore, I have said it more than once that if Renault and/or Nissan were interested in this project, for us it is icing on the cake. But, as far as we are concerned, our cake is intact.
Q: You will launch the RE60 by March or so?
A: Yes, we are scheduled to launch at that time both in terms of product and in terms of the manufacturing facilities. Everything is on schedule and we will go ahead and launch it on schedule. Whether one or the other partner is interested or not or they still take another six months to decide frankly makes no difference to us.
You can well imagine that this being a new product, it is not like we can make 50,000 of it in the first month itself. There is anyway a production ramp-up to take place and I would certainly like to believe that for a long time after production starts, the demand that Bajaj alone will have in its three wheeler markets, not only in India but across the world, will be sufficient to take care of all that. We can produce it in the first few months or possibly even in the first year. So Renault-Nissan can take all the time they want to make up their minds.
Q: For production, sourcing and actual putting on the road you do not need their help?
A: No, we do not need their help. Let me put it like this. Bajaj Auto would not cross its Lakshman Rekha. We would not venture into something ever that was beyond our current skills, because that is the riskiest thing that you can do in a business.
That's why for example we never went as far as a concept like the Nano because we don't think as a company, we have the skills to make a proper car. But, we are entirely confident that right from R&D to distribution we have all the skills necessary, all the resources necessary to make a success of this four wheeler and that's why we are making a four wheeler.
Q: Now let's discuss the two wheeler space itself at the upcoming festival season. How was demand and sales in September itself? Is it any better than what it was in August and how do you see October festival season demand picking up?
A: September as expected is a notch lower than August which is not unusual. That was going to happen. This is in terms of retails to customers. In terms of the company's billing or dispatches to its dealers, it is going to look even worse specially if compared with September last year. Last September had the benefit of being very close to the festive season, this September is a month away from the festive season.
Having said that, if I take a step back, this is what the motorcycle industry looks like and I am not talking about scooters and mopeds. Till a few months back, the industry size was between 950,000 and a million motorcycles every month. This is the total production whether sold in the domestic market or exported. That's huge.
What I am seeing in the last few months is a slippage of about 10 percent. So there is no getting away from the fact that the industry is degrowing at about 10 percent. But, yet this is 850,000-900,000 motorcycles every month. I think that’s a huge industry, that's a lot of motorcycles for everyone to be happy with and going ahead to answer the specific question you asked about the festive season, we are seeing and very confident of at least a 30 percent rise in our volumes in October and November.
To put even more specific numbers on that we have been typically selling 200,000 motorcycles a month in the domestic market apart from the 100,000 odd that we export every month. We are raising our sales to around 260,000-270,000 for both October and November.
This is partly because we expect that kind of upsurge in demand, not only because of the festive season but because all three of our new products have done very well. This is also a reflection of the fact that Bajaj has not stuffed motorcycles into its dealerships in the last few months. We don't have enough stock in dealership to service the festive demand and we are therefore raising production and dispatch by at least 30 percent in both October and November.
Q: What inventory would it be, 30 days?
A: The inventory currently would be about a month's inventory. It may vary a little bit from product to product. We are little short on the new products. A little over a month, maybe five weeks on some of the existing products. But, overall it would be about 30-35 days of inventory which includes everything that is out of our gate and even is in transit for 4-5 days to dealership. So, not all of that stock is really available and ready for sale.
Q: You were speaking about ramp up to 2,70,000 can you give us some colour in terms of how much it would be in terms of Discover and Pulsar, how much it would be in terms of more valued added vehicles for you?
A: We are seeing a good revival in demand for the Pulsar. Perhaps the festive season brings people out in a better mood to buy something that is a little more up market. We are looking at scheduling about 70,000 to 80,000 Pulsar just for the domestic market.
In terms of Discover, we are going to move it up as close as we can to almost 150,000 Discovers each month and this will be driven by over 40,000 of the new Discover 125 ST which has been a fantastic success. Honestly, the new Pulsar has met our expectations, the Discover has exceeded it and the balance about 60,000 will be made up by the Platina.
Q: What about the Egyptian, Sri Lankan markets, basically the export market, are you seeing month by month regular uptick and would the last quarter be better there?
A: Sri Lanka has stabilized quite nicely. It has come back to about 80 percent of our normal volumes. We can still hope for it to creep up a little bit, maybe to 85 percent but it is almost there. We are happy with that result.
In Egypt, the Discover has exceeded our expectations. Before the crisis, we were typically doing 6,000 to 7,000 three wheelers every month in Egypt. It is a big three wheeler market for us. It fell to zero in June and it has come back to 8,000 and now this month, I am told we are under pressure for 10,000. So Egypt has done very nicely. Motorcycle sales are stable in Egypt at over 3,000 a month.
Q: How would margins pan out, I know we are quibbling about decimal points over here but, even the lower raw material cost would add up to something in terms of an improvement in margins?
A: I anticipate commodities to soften slightly in Q3 in terms of actual realization because we all have contracts and don’t immediately realize the gain within this quarter. Having said that, our focus has always been on maintaining profitability and the second quarter was expected to be a difficult one. It has been a difficult one but fortunately. our objective was to stay in the 20% EBITDA margin zone and we will be able to do that.
Q: There has been a lot of bonhomie because of political announcements, stock market performance. When do you see this downturn reversing for your own sector since you spoke of this 10% decline for the year as a whole, for the industry as a whole, when does that stabilize and become flat, get into perhaps 10% up tick?
A: That is very hard to say. It is easier to talk about motorcycles. But, in India anything that is trickling down, whether it is good or bad takes an awfully long time. Quite honestly, the rest of the year, second half will also be negative like the first half has been.
How each company performs within that depends on their own strategies, their own products. But, I don't yet see anything in tangible terms that is going to change either sentiment qualitatively or anything quantitatively in terms of affordability, in terms of interest rates, fuel prices etc. I just don't see it right now.