Record breaking quarter in terms of sales: Bajaj Auto's MD

Excerpts from Business Lunch on CNBC-TV18 Watch the full show » 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 31/05/12 Are Mutual Funds betting on Bajaj Auto?

"Even though net profit came below expectations, the quarter gone by was the best quarter ever," says managing director of Bajaj Auto , Rajiv Bajaj. Net profit rose 6% year-on-year to Rs 726 crore against analysts expected profit of Rs 757 crore.

However, revenue surged to Rs 5,342 crore, its highest ever on the back of strong sales of motorcycles and commercial vehicles. The company also crossed the Rs 1,000 crore EBITDA mark for the first time. On the back of this, Bajaj tells CNBC-TV18 that he is confident of maintaining the 20% volume guidance for the current fiscal. "Specifically in the motorcycle market, volumes will be close to 4 lakh units per month from November onwards," he adds.

The net profit of the company was hurt by notional foreign exchange losses. "But, this will be reversed going forward," said Bajaj. He also adds that stabilizing raw material costs will aid margins of the company.

Below is an edited transcript of his interview. Watch the accompanying videos.

Q: Walk me through what has happened in terms of volume growth for Bajaj Auto in the quarter gone by?

A: The second quarter has really been the best ever in our history, so it is a record breaking quarter. In terms of sales numbers, it is 1.16 million, that is motorcycle and three wheelers together. In terms of revenues, it is over Rs 5,000 crore for the first time ever.

The EBITDA is 20.1 to be precise, better than the 19.1 in the first quarter and for the first time EBITDA is over Rs 1000 crore at about 1,050 crore. So on all fronts, whether it is numbers or financials, it has been a very good quarter for us.

Q: Profits are little bit below estimates. Any specific reason over there or have you had to incur more cost because of the DEPB changes or adjustments?

A: No. This is something I would like explain very explicitly. Our net profit before exceptional items is actually Rs 790 crore as compared to Rs 682 in the corresponding quarter of last year. It is due to the range forward contracts that we have made notional loss. I repeat that it is completely notional forex loss of Rs 95 crore before tax and Rs 64 crore after tax. This loss is notional and will be entirely reversed as the contracts expire over the next few quarters.

In terms of operating performance, it is very strong and that is why on a record turnover and record EBITDA, the operating profit is very high. In fact, it was also helped by the fact that the rupee has weakened. So especially for the month of September, the profitability of exports has really jumped.

However, due to some funny accounting policy that I personally do not really understand, we do not show gains in forex because they are notional. But, we are obliged to show any notional losses and that is why the net appears to be below consensus estimates.

Q: Are you feeling confident about that 20% volume guidance for the second half and would it be concomitant with the kind of margins you have had this time around?

A: I would like to say yes to both those questions because in the first half now we had about 16-17% growth. For me that's close enough to 20% and I don't see any reason why the second half should not mirror the first half. A lot of our growth is actually being driven by exports which has grown by 38% and I don't really see any letup in that.

So both in terms of volume and also the mix, I think the second half will be as good as the first. The Pulsars for example were a little weak in the first quarter, but have come back nicely in the second quarter and that's also one of the reasons why our EBITDA is higher. From a profitability point of view, I personally expect the second half to be better or let's say more specifically Q3 and Q4 to be even better than Q2 because hopefully there will be no more notional losses however notional they are to book. At the same time, we would realize a rate of let's say Rs 48-50 whatever the rupee is at for the entire period whereas in the second quarter it was really only in the month of September.

We have also increased prices to offset DEPB. We have also increased domestic prices from 1st of October, and all that is going to help us. You maybe aware that just a few days ago a policy has been further announced to incentivize exports which gives us 1% incentive across all exports made until 31st March. That in our estimate will bring in the second half about Rs 30 crore before tax. Finally, I think commodities are stable, so I am only seeing an upside now in the second half and I am not seeing any concerns in terms of de-growth or commodities.

Q: You would have seen enough now in terms of demand to talk about the trend that you are seeing on the Boxer. What kind of sales are you expecting to do there on a per month basis?

A: We are currently at a level of about 10,000 vehicles a month. We would like to produce more, but we have a constraint. In the month of October unfortunately we will be producing about 20,000 vehicles less than what we had hoped to. This is because of the law and order situation in Uttarakhand in the Pant Nagar area where our plant is situated. There was curfew for some days and we have lost production that we can not makeup because we are running to full capacity.

Going forward, I would certainly hope that the Boxer volume will build on this. I would be quite happy to hit a volume like 20,000 or more every month which would tell me that we have created a nice new category for the Bharat segment as we call it so that is what we are still hopeful about.

Q: Are you maintaining your guidance of 4 lakh units per month because this is a festive season and should ideally be the best of the entire quarter for you?

A: This month we will do the 4 lakh despite the loss of production because we were actually hoping to be closer to 4.25 lakhs. From next month onwards, as I have said before, I expect volumes to be very close to 4 lakhs. Whether they will be just above or just below is very hard to say because the market is difficult, but I think we should maintain our 16-17% growth as we have done in first half which means we should be very close to 4 lakhs.

But for me frankly, more importantly the numbers don't matter so much because our fixed costs are only 5-6% of our total costs. So nothing much changes one way or the other, if the volumes are little more or less. But keeping the mix right, keeping the pricing right, keeping the marketing spends under control, keeping the Pulsars and three wheelers going right, I think those are very important and as of now all that looks very good.

Q: While your sales numbers have been trending nicely, there is some concern about the fact that you have been chipping off a little bit in terms of market share. As we stand at the end of this quarter and into Q3, what is it that Bajaj position is in terms of market share currently?

A: I think the concern is specifically in terms of domestic motorcycle market share. We had slipped a little bit to about 25.5-26% of market share in the first quarter. We have gained a little more than one percentage point in the second quarter, so we are back to about 27%. I think that is where we will be because market shares are really the reflection of the mind share of the brand in the market place and neither very easy to lose or to gain.

So we are going to stay at 27% for now but as the Boxer catches on and as we introduce the new KTM Pulsar motorcycles from January, I certainly hope that we will gain share. As I said before, I hope that by the time we finish this year we finish at a exit market share closer to 30%.

Q: Given how high revenue dependence has become on the export market, any concerns on what the current scenario is and whether over there you will see some crimping of demand in the second half?

A: I would say we have to be watchful. Until September, we have had no issue and that is why the exports have grown as nicely as they have. Even in the month of September, in Africa's largest market Nigeria if I remember right we sold close to 30,000 motorcycles and over 3,000 three wheelers.

But given the state of most currencies, consumer prices are going up, consumer sentiments are being affected. So I would certainly say one has to be watchful, although as of now we do not see any tangible signs of a problem. Our export volumes for this month will be around 140,000 that we have been clocking in recent months but we have to be watchful and take each month as it comes.

Q: What kind of realizations per unit did you have this time around and what are you confident it could hold that for Q3 and Q4?

A: I do not know the exact realization per unit but it has been slightly better than both the Q1 and also in the corresponding quarter of the previous year. Effectively if we compare for example Q2 last year and this year, on the down side the commodities have hit us by about Rs 200 crore. On the upside we have gained Rs 200 crore each on account of both volume and mix and pricing. So that tells me that the realization is better, but I can't give you a number right now.

Q: Some of the price increase you have already passed through, so any price increases that you are considering for the second half or going into FY13?

A: No. To be specific on October 1, for exports we increase prices by 3.5% for all products across all export markets. In terms of domestic sales we effected a Rs 500 price increase across all Discovers and Pulsars, but not on the Platina and the Boxer. We also increased prices selectively on some of our three wheeler models.

Since we do not see commodity pressures in this quarter, we do not anticipate any further price increases at least not in Q3.