Worst is behind us, good times to come: Bajaj

Rajiv Bajaj, MD, Bajaj Auto explains to CNBC-TV18 post announcement of the company's results that the present quarter was the worst for the company and expected to post better results from hereon. 

Below is an edited transcript of the interview on CNBC-TV18. Q: Can you list the highlights of the quarter's performance? The results are a tad better than expected though the margins have disappointed.
A: For the quarter, there is a positive factor and not so positive factor. The positive factor is the margins. The EBITDA margin at 19.4% is actually a little better than last year at 19.1% despite the pressure on volumes, product-mix, trouble in export markets etc.
The pressure of commodities continues thanks the weakness in the rupee. Despite all this pressure, in absolute terms the EBITDA is up from about Rs 911 crore to Rs 961 crore and as a percentage, it is up from 19.1% to 19.4%.
Of course it is down quarter-on-quarter, but it’s up year-on-year. So for us that is a positive because that has proved the robustness of our cost structure. We have very low fixed costs.
Our fixed cost as percentage of sales is under 10%. It’s in single digits and to the best of my knowledge, it’s the best in the industry and that makes us quite immune to any situation where growth tapers off.
What is not positive is the fact that sales and revenues are flat. Sales are lower by 1%. Total revenues are marginally up from Rs 4,850 crore to Rs 5,050 crore. We should have done much better than that. The reason for that is the delay in the launch of new products which was to drive growth in this sluggish market.
We eventually launched our new products, but we have lost out on the growth momentum. We are ramping up production and I hope that while maintaining or improving margins, we will demonstrate growth in sales as well. Q: Do you expect the quarter-on-quarter pressures get worse? Will it dwindle by another 1% in the coming quarter and will sales make up for loss in margins?
A: Nobody knows the future. The company expects the quarter to be the worst in terms of profitability and EBITDA margins because we expect sales to grow as production is ramped up with new products. We expect our mix to improve particularly in the domestic market because we will sell more of the bigger 'Discover' and the 'Pulsar' models.
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We also expect our three wheeler sales to grow in the domestic market because April-May is usually the worst time for three-wheeler sales in the domestic market. We also hope we have overcome problems in our two major export markets – Egypt and Sri Lanka.
Exports will return half way-to-normal in volumes and this month, I expect near-normal volumes from August. So, if we stack up all these positives we have every reason to believe that Q1 represented the most difficult and the worst quarter of this year in every way.  From here onwards, things can only get much better. Q: Realisation, on a quarter-on-quarter basis has declined 1.6%. Could that be attributed to the improvement in the product mix? There is expectation that permits would be higher for three-wheelers the second half. Are you expecting that to come through from the regulated centres?
A: You are right. Despite raising prices in early May there was a drop in realisation. This is because of the adversity of the mix of three-wheelers and motorcycles.
The sports segment in which Pulsar holds 50% of the share and inched to garner close to 20% of the motorcycle industry slipped to about 16-17%. So again the adversity of the mix between Pulsar and Discover and Platina has also not worked in our favour.
We are very hopeful now that with the new products in the domestic market and the resolution of problems in the export markets, we will be able to restore the mix. Therefore realisation will go also up on the increase in prices effected on July 14 in response to the continuous escalation in commodity prices, particularly aluminium. Q: What was the average hike in realisation?
A: It was about Rs 500 for each motorcycle and between Rs 500 - Rs 1500 on each three-wheeler only in the domestic market. The realisation for exports was not computed as the rupee is weak. Q: What kind of a run rate do you hope to achieve in Sri Lanka's three-wheeler market up and overall in exports for the year?
A: In Sri Lanka, we have corrected prices with our distributors. I think this will allow us to return to the level of selling about 7,000 motorcycles a month. We used to sell about 10,000 three-wheelers a month, but now I think we can achieve sales of 7,000-8,000 three-wheelers a month. I hope we can achieve both sales targets from August.
If Egypt returns to normalcy as expected between July and August, I think we will be able post a rate of exports of about 110,000 motorcycles and around 25,000 three-wheelers every month.
This would put us within 135,000-140,000 total vehicles exported each month in the second quarter and hopefully we can build on that from Q3 onwards. From October, we will start exporting the new Discover and Pulsar models to all our export markets. Q: Regarding margins, analysts have been a little perplexed as to how Bajaj Auto is able to maintaining margins at over 19% when the product mix is bad, the raw material savings is not high and prices were cut in Sri Lanka. Is there major cost-cutting underway and will you still stick to the 20%-margin guidance for the year or does that look challenging?
A: I have always, for the last three years, called it the magic of logic. It’s very simple actually. Our strategy is based on is two things- strong brands and a robust cost structure.
Over the last 10 years, we have increasingly focused on R&D, marketing and less on manufacturing. Most of our manufacturing is done by over 200 vendors who deserve the credit for maintaining fixed costs in single digits.
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When analysts benchmark us with other auto companies, they expect the overheads to bear the brunt when the economies of scale are weak and the market is flat. And that is because we are less like an auto major and more like an FMCG company.
Our efforts and investments are focused on marketing and R&D and much less on the shop floor. That is why even when volumes go up significantly, we don't have much leverage. We won’t gain too much, but the good news is that even if volumes remain flat, we don’t lose out contrary to expectations. Q: You hoped to see incremental sales in two of your new products. What kind of a growth are you looking at for the Pulsar 200 NS as well as the Discover 125 ST?
A: In June we sold about 2,500 units of each as per target. In this month, our target was to sell 5,000 units of the new Plusar and 10,000 of the new Discover. As of now it seems that we will meet those targets and for August, we wanted to sell 20,000-25,000 units of Discover and 10,000 units of Pulsar and I am hopeful we will be able to achieve that.
This sales will bring a lot of additional customers from our competition and that is why we hope that from August onwards we will move from the current sales level of 2,00,000 motorcycles per month in the domestic market thanks bigger and sportier motorcycle-models with bigger margins.
_PAGEBREAK_   Q: Does your optimism spring from the fact that you have revived the export markets or is there anything positive in the domestic market?
A: I think its all relative. As I see it right now we are same position as we were in April 2009. The fiscal of 2009-10 was a turnaround year for us. In four-and-a-half years we launched four new products, three Pulsar model and one Discover model.
We have done the same thing so far. This time around we launched two new Discover models and one Pulsar model so far this year. We have another new product coming up for launch around September-October.
Three years ago, for the first six months our results didn't change too much because we were building production, increasing stock at the dealerships and the products were yet to find traction in the market place.
But after September 2009, there was no stopping Bajaj Auto. The initial response to our products was good. The competition does not have anything to stand up to the products that we are putting out. So, that obviously makes me feel very optimistic because ultimately it's all related to what the competition is doing. Q: How will the price increase that you have initiated affect your market share? What would the target be by the end of the fiscal?
A: Over the last six months, nobody's market share has changed as far as the motorcycle market is concerned. The motorcycle marketshare in the domestic market has remained flat for all participants.
In the first quarter of this year, the motorcycle industry has demonstrated a growth of 6% but every one of those motorcycles that contribute to the 6% growth is standing in the dealers’ showroom. It’s all gone into stock and some of the players are happy to do that and that is fine.
We haven't done that. Our billing to dealers this year exactly matches their retail to customers. As a result, it appears that the industry has grown by 6% whereas Bajaj’s sales have been flat. But the reality at the retail level is that everything is flat and the market share hasn't changed.
But we actually lost about 1.5 percentage points in terms of motorcycle market share in the domestic market because someone else has been putting a lot of stock at the dealerships.
Going forward, it's very hard to say what will happen. Will the market remain flat or will it slip further down? I do not know. But what I do know is this - the second quarter for this fiscal for the industry will be inferior to the second quarter of last year because in the second quarter of last year we had a great September because that was the month when we build stock for Dussehra and Diwali which came around in October.
This time Dussehra is towards the end of October and Diwali is in November. So September will not give the manufacturers the opportunity to build stock at dealerships. I expect every motorcycle manufacturer to be negative in Q2 this year versus last year. But that is only because the period of sale has shifted to Q3.
For Bajaj, I would certainly like to believe that we can remain positive if our new products continue to find the kind of favour that we think they will. But that is something only time will tell. Q: The second half would be much better than Dussehra and Diwali. The Pulsar, the 200 ST and the RE60- all of that should give some excitement then?
A: We are looking forward to the second half. In fact I cannot wait to get past Q2. I expect exactly the same scenario as in 2009-10 from October 2012. Bajaj should be in the next orbit as far as sales are concerned particularly about the domestic sales of motorcycles.