Bajaj Auto can maintain EBITDA of 13-14% for FY09

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS Bajaj Auto declares results, stk gear up Bajaj Auto Q1 cons net profit at Rs 155.84 cr ALSO READ See latest News about Bajaj Auto See previous management interviews See what other Experts & Brokerages are saying about Bajaj Auto Bajaj Auto BSE | NSE 28/05/12 Are Mutual Funds betting on Bajaj Auto?

Bajaj Auto has announced its first quarter results. The company's Q1 consolidated net profit at Rs 155.84 crore versus 168.72 crore, YoY. Its net sales were up at Rs 2338.3 versus Rs 2140.97 crore, YoY. Its unrealised Forex loss at Rs 98 crore. Its EBIDTA margin at 11.5% versus 13.41%. Bajaj Auto Q1 standalone net profit was at Rs 175 crore.

Rajiv Bajaj , MD of Bajaj Auto , said the EBITDA margin for June is at 12.9%and 11.5% for the entire quarter.  

They can maintain EBITDA margin of 13-14% for the rest of the year. Bajaj believes worst may be over for the sector. The growth in exports and bikes will help volumes going forward, he said.

He expects three-wheeler sales to bounce back to 12,000 levels by August. Bajaj will achieve sales of 75,000 units based on Xcd platform this year.

Excerpts from CNBC-TV18's exclusive interview with Rajiv Bajaj:

 

Q: Good numbers, at least as per street expectations but margins under severe pressure-200 bps lower this time. How do you see the situation going forward? Will the pressure continue, will the volumes be able to compensate for the margin pressure?

 

A: I will take that in two parts. One, the brief snapshot is like this- for the last year our EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was around 14%. In the last quarter of the last year, it had slipped to about 12.5% for reasons that are well-known. In the first quarter of this year, it's at 11.5%. So it would appear it has slid by another 1% between the fourth quarter of last year and the first quarter of this year.

 

But in June it is actually at 12.9%; so we have kind of bottomed out sometime in April and margins are improving now. The reasons are the same; the mix is better, prices are actually higher, and exports are higher than ever before. So I think the worst is over and it is my own anticipation that margin in the region of 13-14% is certainly doable at an EBITDA level for the rest of the year.   

 

Q: On the back of what kind of volume growth given the way interest rates are moving and you highlighted the fact that lack of finance will be an issue to deal with?

 

A: Let's take one thing at a time: the lack of finance affects only the bottom segment. As a result of that over the last 18 months, the bottom segment has contracted from being about 36% of the market to now being about 28% of the market and it stabilised there for the last six months since January. So I think that is behind us. In terms of growth, we believe that consumers will grow to 125CC-plus motorcycle segment; this segment has grown 14% this year and Bajaj has grown 21%. So this segment is now almost 37.5% of the market and we have 48% market share there. So this segment will grow and we will grow there.

 

The second area of growth of course is exports; we have grown at about 35-40%. We expect to export close to 8,50,000 (eight hundred fifty thousand) vehicles this year. So the growth in motorcycle and the growth in exports will keep the momentum going for us.

 

Q: The three-wheeler segment, I admit that it is not a giant share of the Bajaj Auto complex itself but nevertheless lower in terms of exports, lower in terms of sales is that a point of concern. What is the plan going ahead?

 

A: In terms of exports there was one single factor, which has caused a slight drop in the three-wheeler sales as far as exports are concerned, which was our export to Egypt which had stopped for few months that has started again since last month. So I think from August itself, we will see three-wheeler exports back at the level of about 12,000, which will be as high as it ever were, so that is going to be good.

 

As far as the domestic market is concerned, Bajaj is basically participating with small three-wheelers, which applies within the city and are regulated by permits the growth there is really flat and where the three-wheeler market is really growing is outside the cities for which you have to make these humungous, big three-wheelers with their noisy single cylinder engine, that's not Bajaj. So our resources are focused on some what longer-term to develop new four-wheelers both commercial and passenger cars, and for this reason we are giving in that sense giving an opportunity to participate today in the big three-wheeler market, because we do not believe that this will last. So it is just a question of making choices as one has to sometimes sacrifice something in the short-term for a bigger gain in the longer-term.

 

Q: One more word on the exports - that has been very good well performing sector. How do the margins pan out over there and what do you see as year end targets both in terms of volumes and margins?

 

A: In terms of margins, the export margins have always been higher than the domestic margins for us. This is primarily aided by the fact that there are some incentives for exports. This quarter however, the margins for both exports and domestic are at the same level primarily because of the change in the foreign exchange situation - that has been very volatile in the recent weeks or in the last couple of months. Going ahead, I think the exports will continue to grow at this rate of about 35-40%, and as I said earlier we will export about 8,50,000 vehicles, which is about third of our production which is very significant and our dream of exporting 1 million vehicles a year, we hope that we can realize next year.

 

Q: The other clarification that analysts are seeking is the unrealized forex loss of 98 crore in FY08 you revealed that you have a forward cover of about USD 350 million, what is the current position on that given that you are emphasizing on enhancing your export volumes, the current forex positions at what rate have you taken? Have you revised it from the previous Rs 40 to a dollar?

 

A: There are several contracts in place that will roll out over the year. If I have to say this briefly, the position is like we have made a provision for about Rs 97 crore as a reflection of what we have hedged through the year. We have hedged about 60% of our exports and we had two choices, we can show it as a loss in Q1 and then write it back over the three quarters or we can provision it separately and this will effectively become zero. It will square up at the end of the year. This seems to be a simpler way to do it, which means that by the time we come to the end of the financial year this Rs 97.5 crore will be zero.

 

Q: On XCD particularly, you are looking at launching new variants closer to the end of this calendar year what is the strategy you have also introduced XCD in Indonesia, what are the kind of sales targets that you are working with on that product?

 

A: XCD 125, which we launched in September last year is the first product. We are currently doing about 25,000-30,000 of this each month, of which 5,000 are being exported. Over the rest of this financial year we will introduce four more products of the XCD platform. Some will be completely new, some will be variants and on the basis of these four we hope and we aim to reach a level of about 75,000 vehicles per month from this platform obviously the growth of 25,000 to 75,000 would imply some cannibalization but overall it will give us incremental volumes and lead us on to-we hope from a market share of about 32% right now to something in the region of 35%-40% as we go through a year.

 

Q: Your point on margins has been taken, you have sensed that you have bottomed out in terms of the pressures, what about volumes the run rate at the moment is about 13% will that be maintained, will that be bettered for the next twelve months?

 

A: I would say up until October, it should be at this level. I must also clarify that although 13% is good first, it comes largely from exports. As far as the domestic market is concerned, while there is growth, I would like to clarify that this growth is there at the primary sales level from the company to the dealerships; this looks good compared with last year because last year all the major manufacturers including us were in the process of reducing stocks at the dealerships. At a retail level, the fact is that the market is flat perhaps still negative and that is why until October 13% or thereabouts represents the best that can be. In the second half of the year, I anticipate much stronger growth for Bajaj simply based on the introduction of the new products that we spoke about.