Saw highest-ever EBITDA due to forex hedge, volumes: Bajaj

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Bajaj Auto has declared its first quarter numbers of FY10. Its net profit increased 67.43% to Rs 293 crore versus Rs 175 crore year-on-year (YoY).

The company's net sales went up 1.6% at Rs 2,259 crore from Rs 2,224 crore, YoY.

Rajiv Bajaj, the company's managing director, said the company recorded its highest every absolute EBITDA this year. "However, I actually expect the subsequent quarters to be even better," he said. "Our gains came from three areas. First, foreign exchange: we were hedged at Rs 40 to a dollar for the whole of the last financial year, whereas now our realisation is at 48 or 49. The second biggest gain comes from the increase in volumes. And then of course there is the material cost and those kinds of contributors. But the main contributors are the foreign exchange being realised at 48-49 and the volume increase."

Here is a verbatim transcript of Rajiv Bajaj's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Very good achievement as far as the margins are concerned, although the topline was muted. First up from you, a guidance. Do you think that the margins can continue at the pace at which you have achieved in Q1?

A: Let me put it like this: On the one hand, although the EBITDA that we achieved, especially in absolute terms, of Rs 455 crore, is the highest ever in our history, I personally anticipate that it is also the lowest in this year. So, I actually expect the subsequent quarters to be even better.

The EBITDA margins, at 19.5%, however, may not be quite as sustainable because we are launching a couple of new motorcycles in the value space, in the mid segment. Those bikes cannot hold EBITDA margins in the range of 19%. So, as a percentage, the EBITDA may not be exactly sustainable. But certainly in terms of absolute EBITDA, we should do better in the coming quarters.

Q: You spoke about the new bikes and the value segment, why this turnaround in strategy. You were explaining a year ago that the change to 125 cc was a reasoned decision and that you had compared the Hero Honda's persistence with 100cc bikes to your persistence with scooters when the world was moving to motorcycles. Why this u-turn?

A: Let me put it like this; I'd like to say that it is only in mathematics that the shortest distance between two points is a straight line. More specifically, in our context, if we are up against someone who is an overwhelming leader in the 100cc space, there is no way one can really overcome that in a brand-conscious market with another 100cc bike.

The motorcycle engine that we have just put into production, the 100cc engine, is in our estimate the most fuel-efficient engine in the world for a motorcycle. However, if this had been installed on what I like to call a 100cc product such as a City or a Platina, we couldn't have aspired for big gains in volume or market share. But since it is being installed on a brand, Discover, which is basically associated with the more premium space, as a 125cc and 135cc motorcycle, then putting this engine or incorporating it onto that brand, by doing that what happens is that the consumer doesn't see this as a 100cc bike. He sees this as a Discover with an extremely fuel-efficient engine.

So, I would still insist that we haven't changed our strategy. We are still trying to upgrade consumers from a typical 100cc bike to something bigger, something more aspirational.

Q: Your sales in the comparable quarter last year were 4.4 lakh; it is 5.47 lakh this quarter. Since the revenues stayed flat, what was the average realisation per bike that you had - if you keep track of a number like that - compared to, let's say, the last quarter?

A: If you are comparing quarter-on-quarter (QoQ), our gains came from three areas. First, foreign exchange: we were hedged at Rs 40 to a dollar for the whole of the last financial year, whereas now our realisation is at 48 or 49. So, the biggest gain, about Rs 100 crore for the quarter, comes from there.

The second biggest gain comes, as you have correctly pointed out, from the increase in volumes. And then of course there is the material cost and those kinds of contributors. But the main contributors are the foreign exchange being realised at 48-49 and the volume increase.

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