Despite slowdown, Bajaj eyes 40K 3-wheeler sales from Aug

The second  largest two-wheeler maker in India, Bajaj Auto reported a dip in total sales for the month of June. Its total sales dropped to 6% year-on-year to 3,45,162 units as demand for motorcycles in India slowed down. A disruption in three-wheeler sales in Eygpt and Sri Lanka also hit the company's exports.

Domestic motorcycle sales of Bajaj Auto were up 2% (YoY) and three-wheeler sales went up by 15% (YoY). However, its exports were lower by 15,000 units. In an interview with CNBC-TV18, Rajiv Bajaj, MD, Bajaj Auto said that three-wheeler sales are likely to improve to 35,000 units in July. Bajaj is also optimistic of touching the 40,000 plus range for three-wheelers on a month-on-month (MoM) basis from August and is therefore, not willing to scale down guidance until September. According to him, this segment has marginally gained market share in the present quarter. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: Could you give the numbers you have reported this month in terms of sales? A: This month has been a mixed month for us. The good news is that we have done well in the domestic market. Domestic motorcycle sales are up year on year (YoY), even if it is only by about 2%. But, I think that is good because in our estimate, industry is probably negative for reasons that we are all well aware of. Domestic three-wheeler sales are up almost 15% YoY, which is not just good but surprising. On the domestic front, all is well. Unfortunately, this time we are let down by exports and exports are about 15,000 units less than in June last year. There is a specific reason for that. The disruption of three-wheeler sales in Egypt accounted for about 5000 out of those 15,000 units and in Sri Lanka it was 10,000 of the 15,000 units. So the big loss for us last month has been these 15,000 three wheelers which we could not export. Q: So specifically what has the figure been in terms of motorcycle total sales for this month and how much exports have come in at? A: Our total sales have been about 350,000, of that 320,000 are motorcycles which YoY is flat. Since domestic is a marginal positive, there is marginal negative on the exports. But the total motorcycle sales, domestic and exports both put together is 320,000 units. We have about 27,000 three wheelers that include domestic sales as well as exports. This should have been 15,000 higher. As far as export of motorcycles and three wheelers together are concerned, they stand at about 116,000 versus 135,000 last year. That loss of 15,000 three wheelers was impossible to make up. Q: 3.20 is also a little bit off what you did last month in terms of motorcycle sales. Can you just walk me through what the experience has been across categories because the expectation was with some of your new launches come June, the motorcycle sales could or should have been better. A: Yes the good part again is that almost two thirds of the motorcycle sales of 320,000 units come from the more profitable brands including Discover which is around 125,000 units. In the premium segment offering including Pulsar, Avenger, KTM and Ninja, it is about 75000. So 200,000 motorcycles still come from the higher end. Qualitatively, the mix is good.
 
In terms of numbers, it's flat. I don't recollect offhand last month's numbers. But they couldn't be too different. It’s a difficult time in the market, whether it's June or May or April. In fact, I will say that ever since we rolled out our strategy in April 2009, we had 3 very good years. But this last quarter has been difficult. It's been difficult primarily for 2 reasons. One because the domestic motorcycle market has been quite flat and two, which was completely unforeseen, the disruptions in Egypt and Sri Lanka. But let me add to that. We have resolved with the help of some activity on both product configuration and price rationalization. We have managed to resolve the issues in Egypt and Sri Lanka. What we will see is in terms of 3-wheeler sales which are very important for our bottom-line as well as opposed to the number of 27,000 that we did in June. We will see a number like 35000 in July because Egypt normalizes completely and Sri Lanka will be half way to normal and from August we should be back in the 40,000 plus band for three-wheelers. Unfortunately, we have lost out in the first quarter but hopefully from this quarter onwards we are back on target. Q: Specifically on motorcycles, given what you are seeing on domestic trends and what you are facing in the market over here, are you still feeling confident about the full year volume target that you have set out or are you considering a rethink on that? A: I would not consider a rethink up until October-November. We would have done even better than we have with regards to motorcycles. In a sense, I echo what you said earlier about our motorcycle sales, had we ramped up new product volumes faster. To give some specific data on that, June was the first month when we could actually produce both products through the month. We shipped out 2200 units of the Pulsar 200NS and we shipped out 2300 units of the Discover 125 ST. So we did 4500 units as opposed to our target of 5000 unit. We did pretty well. This was enough to feed the state of Maharashtra and we haven’t been able to go to any other state. In July, we wish to get to 15000 units of these, that is 5000 units of Pulsar and 10000 units of Discover. Hopefully, by September, this total should be in excess of 30,000 units, probably closer to 35,000 motorcycles. If these two products find that kind of acceptance in an otherwise difficult market, then I am still confident that we will achieve our guidance of 5 million vehicles. I must wait till September to see how market responds to the new products before making a change either way. Q: Are you beginning to face an inventory pileup situation, especially in some of the smaller cities? A: We have been very careful about this and we have been disciplined both in Q4 of last year and Q1 of this year to make sure that we are retailing whatever we bill. When new products are introduced, as was the case with the Discover in April, followed by these two new products the Pulsar and the new Discover, there is always some inventory that goes into the pipeline of the dealer. Otherwise, in our existing products, we have been disciplined. We have kept the inventory to about a month's level, which is the norm. Fortunately, going into the monsoon period which is the lean period for the industry, from now until September it will be a lean period particularly because the festive season is a little later this year. We were aware of that and we didn't want to create any trouble for us on that account. Our inventory is under control and we are okay on that front. Q: You have been through lean patches before. Just to contextualize it in terms of two numbers, one, are you facing any pressure on market share and two, are you getting a bit more worried about that margin outlook that you have set out? A: In terms of market share, it will remain pretty much unchanged because the pressure is equal for everyone, whether its motorcycle, scooters or all the two-wheelers. On three-wheelers, we may have marginally gained market share but, I don't have the numbers yet for the competition. But, I think we might have gained market share this quarter.
 
As far as margins are concerned, fortunately for us, our business is highly variabilized. The fixed cost component of our business is only about 6% of total cost. Even if volumes are flat or if they were to be marginally negative, it would not change things much. Typically, if Bajaj has been at a 20% EBITDA, the most that it can shift by is about 1% or so. While the opposite is also true, if our volumes were to grow strongly going forward, we would not really gain in terms of any economies of scale because there are no fixed costs to further apportion over those volumes. Similarly, the downside is very limited. Despite flat volumes, the margin in terms of percentage will not waver much. Of course the absolute margin will change because sales have been flat and particularly so because 3-wheeler sales have been lower than last year.