Bajaj Auto bets on new launches to maintain sales momentum

Net sales were up 10.76% to Rs 4,651 crore in the January-March quarter of 2011 from Rs 4,199 crore in the corresponding quarter of last fiscal.

Bajaj Auto MD Rajiv Bajaj told CNBC-TV18 that domestic market continued to be soft but for now he is hopeful the company will be able to sell 50 lakh units in the current financial year.

He is banking on new launches like the Pulsar 200 NS and new Discover to help it maintain sales momentum. He further informed that the company's overall market share has dipped from 26% to 25.4%, year-on-year.

Below is the edited transcript of Bajaj’s interview. Also watch the accompanying video.

Q: Can you take us through the highlights of the quarter, looks like there were raw material pressures?

A: We had a pretty good quarter. The last quarter of the last year and therefore the whole of the last year was influenced by an exceptional item in the last quarter of Rs 725 crore after tax. So, I will make my comparisons leaving that aside. The profit after tax (PAT) for the last quarter of this year was about Rs759 crore, which is 12% up on last year.

The EBITDA was Rs 972 crore, which is 20.7% and this as an EBITDA margin is 0.3% higher than the same period last year, which was 20.4% corresponding to Rs 859 crore. The revenues are up about 11% to Rs 4,800 crore, those are the main financials for the fourth quarter.

Q: What were your operating margins?

A: If the EBITDA was 20.7%, the operating margin is perhaps a percentage point less than that because in our case interest and depreciation is very little. So, I would say it would be about 19.5%-19.7%, I don’t know the exact number.

Q: The street has calculated it to be about 19.8%, that is slightly below what analysts were expecting, it is primarily perhaps due to raw material to sales that has gone up by about 40-50 bps in this quarter. What is the outlook on that? Commodities clearly have receded quite a bit in the last 15 days are you expecting some pressure to be off in this quarter?

A: From Q3 to Q4 for example we have not seen any escalation in raw materials. What has happened is if you look at our Q3 numbers and compare them with Q4, you will see a clear impact of lower volumes which stands to reason because Q3 benefited from the festive season as is the case every year usually. That little bit of loss of operating leverage makes it appear as if costs are going up but it is just a volume issue. If I am not wrong, from Q3 to Q4, the difference on account of volumes alone is about 100 crore.

Q: What exactly is the exception item that you have added this time around into your EBITDA because if you calculated from the P&L the EBITDA stands at about Rs 920 crore? Is there any exceptional item that has been added into the EBITDA performance this quarter around?

A: No there isn’t. The only exceptional item which is below the PAT is Rs 13 crore after tax, about Rs 20 crore before tax as you have reported correctly, which is to do with the reversal of the MTM (mark-to-market) loss which is notional.

Otherwise the EBITDA I guess then we are differing on the interpretation of it. For us the EBITDA is before interest, tax, depreciation, advertisement, that figure is 20.7% and Rs 972 crore. The operating margin to which your colleague referred to as 19.8% I think that may be correct and that is Rs 926 crore, but I don’t have a figure of Rs 920 crore.

Q: What kind of margins do you think you can hold out in FY13 because this 20% margin was something that you had guided for in FY13 as well. Is there a possibility that it could dip from these levels purely because of raw material costs and your product mix queuing in favor of low margin products?

A: You have to give us a little more credit, we guided 20% for the last 3 years and we have achieved that. For the year as a whole we finished at 20.2% and it has been a difficult year so I think 20.2% is really quite good. Having said that, I have always said that we are not wedded to any figure for the EBITDA as such, but what we are always keen to demonstrate is that we will be significantly above the industry average.

For example, our EBITDA figure is a good 7-8% higher than the average industry figure of about 12%. When I say industry I am talking about the entire auto industry, not just the two-wheeler industry. In terms of the operating margin we are close to double of the industry. Going forward, it is hard for me to put out a number.

All I can say is if things remain as they are, I don’t see any reason why we should not remain in the 20% space, but if the market softens considerably and we lose operating leverage, if something goes wrong with the export markets as has happened this month in Sri Lanka or if for some reason which I don’t expect, but if for some reason there is pricing pressure on the market place because of higher competition then the entire industry will be de-rated.

So, obviously we cannot hold on to 20%, but in relative terms because that is what competition is about, we will continue to be as we like to say is distinctly ahead.

Q: In that were you positively surprised by what dream you had to deliver in terms of pricing, there was no undercutting clearly?

A: Yes, I am very encouraged by this approach of Honda Motorcycle India Ltd (HMSI’s). It is a very fair price. To the best of my knowledge from what I have heard from media reports, the capacity for this product is about 30,000 a month and this product is being introduced in an industry size over five hundred thousand a month. So, from an industry point of view, it is not going to make a big impact even if it achieves the best result of 30,000 a month.