Bajaj Auto bets on new launches to maintain sales momentum

India's second largest two-wheeler producer Bajaj Auto repoted a profit after tax of Rs 772 crore in Q4FY12, down 44.86% as compared to Rs 1,400 crore in a year ago period.

Net sales were up 10.76% to Rs 4,651 crore in the January-March quarter of 2011 from Rs 4,199 crore in the corresponding quarter of last fiscal.

Bajaj Auto MD Rajiv Bajaj told CNBC-TV18 that domestic market continued to be soft but for now he is hopeful the company will be able to sell 50 lakh units in the current financial year.

He is banking on new launches like the Pulsar 200 NS and new Discover to help it maintain sales momentum. He further informed that the company's overall market share has dipped from 26% to 25.4%, year-on-year.

Below is the edited transcript of Bajaj’s interview. Also watch the accompanying video.

Q: Can you take us through the highlights of the quarter, looks like there were raw material pressures?

A: We had a pretty good quarter. The last quarter of the last year and therefore the whole of the last year was influenced by an exceptional item in the last quarter of Rs 725 crore after tax. So, I will make my comparisons leaving that aside. The profit after tax (PAT) for the last quarter of this year was about Rs759 crore, which is 12% up on last year.

The EBITDA was Rs 972 crore, which is 20.7% and this as an EBITDA margin is 0.3% higher than the same period last year, which was 20.4% corresponding to Rs 859 crore. The revenues are up about 11% to Rs 4,800 crore, those are the main financials for the fourth quarter.

Q: What were your operating margins?

A: If the EBITDA was 20.7%, the operating margin is perhaps a percentage point less than that because in our case interest and depreciation is very little. So, I would say it would be about 19.5%-19.7%, I don’t know the exact number.

Q: The street has calculated it to be about 19.8%, that is slightly below what analysts were expecting, it is primarily perhaps due to raw material to sales that has gone up by about 40-50 bps in this quarter. What is the outlook on that? Commodities clearly have receded quite a bit in the last 15 days are you expecting some pressure to be off in this quarter?

A: From Q3 to Q4 for example we have not seen any escalation in raw materials. What has happened is if you look at our Q3 numbers and compare them with Q4, you will see a clear impact of lower volumes which stands to reason because Q3 benefited from the festive season as is the case every year usually. That little bit of loss of operating leverage makes it appear as if costs are going up but it is just a volume issue. If I am not wrong, from Q3 to Q4, the difference on account of volumes alone is about 100 crore.

Q: What exactly is the exception item that you have added this time around into your EBITDA because if you calculated from the P&L the EBITDA stands at about Rs 920 crore? Is there any exceptional item that has been added into the EBITDA performance this quarter around?

A: No there isn’t. The only exceptional item which is below the PAT is Rs 13 crore after tax, about Rs 20 crore before tax as you have reported correctly, which is to do with the reversal of the MTM (mark-to-market) loss which is notional.

Otherwise the EBITDA I guess then we are differing on the interpretation of it. For us the EBITDA is before interest, tax, depreciation, advertisement, that figure is 20.7% and Rs 972 crore. The operating margin to which your colleague referred to as 19.8% I think that may be correct and that is Rs 926 crore, but I don’t have a figure of Rs 920 crore.

Q: What kind of margins do you think you can hold out in FY13 because this 20% margin was something that you had guided for in FY13 as well. Is there a possibility that it could dip from these levels purely because of raw material costs and your product mix queuing in favor of low margin products?

A: You have to give us a little more credit, we guided 20% for the last 3 years and we have achieved that. For the year as a whole we finished at 20.2% and it has been a difficult year so I think 20.2% is really quite good. Having said that, I have always said that we are not wedded to any figure for the EBITDA as such, but what we are always keen to demonstrate is that we will be significantly above the industry average.

For example, our EBITDA figure is a good 7-8% higher than the average industry figure of about 12%. When I say industry I am talking about the entire auto industry, not just the two-wheeler industry. In terms of the operating margin we are close to double of the industry. Going forward, it is hard for me to put out a number.

All I can say is if things remain as they are, I don’t see any reason why we should not remain in the 20% space, but if the market softens considerably and we lose operating leverage, if something goes wrong with the export markets as has happened this month in Sri Lanka or if for some reason which I don’t expect, but if for some reason there is pricing pressure on the market place because of higher competition then the entire industry will be de-rated.

So, obviously we cannot hold on to 20%, but in relative terms because that is what competition is about, we will continue to be as we like to say is distinctly ahead.

Q: In that were you positively surprised by what dream you had to deliver in terms of pricing, there was no undercutting clearly?

A: Yes, I am very encouraged by this approach of Honda Motorcycle India Ltd (HMSI’s). It is a very fair price. To the best of my knowledge from what I have heard from media reports, the capacity for this product is about 30,000 a month and this product is being introduced in an industry size over five hundred thousand a month. So, from an industry point of view, it is not going to make a big impact even if it achieves the best result of 30,000 a month.

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Q: Is it safe to say that you will maintain that 5 million unit volume target that you have for FY13 or perhaps you may have to scale it down?

A: As far as the last quarter is concerned I appreciate the slight dissonance on the topline, it comes more from mix than any other reason because Platina sales were little higher than expected, Pulsar a little lower, the three-wheeler a little lower so on and so forth. As far as going forward is concerned, as of now we have not reason to revive our forecast one way or the other.

We will stay with 5 million vehicles which is roughly a little more than 500,000 three-wheelers and a little under 4.5 million motorcycles. The only significant blip we have now is Sri Lanka that too largely just for this month. Last month our exports to Sri Lanka were absolutely normal and I expect normalisation to begin again from June. Other than that, I don’t see anything so concerning that as a company we must review estimates downwards.

Having said that, a lot of hope we have placed on the three new products that we are putting into the market at least this quarter; the new Discover 100, that started off last month, The Pulsar 200 NS that will go into showrooms in Maharashtra this month and the new Discover 125 ST, we revealed in Delhi few days back , which will go to market next month. It is very important for us that these products evoke a good response. If they evoke the expected response, I think we are good for 5 million.

Q: I was looking for any traces from your talk whether you are expecting it to revise your volume grow higher both for the industry and yourselves, are there any straws that we can clutch to look at perhaps better than expected growth for FY13?

A: I have always been candid with you and I would have said so, if it was so. Right now the domestic market is soft. April has been better than April last year but that is only because the marriage season was preponed, this year May is currently running low than last year, so that is a bit of a concern.

As I said in the export market now, Sri Lanka which is very big for us, 10,000 motorcycles, 10,000 three-wheelers a month. This month our exports will be zero. I am sure this will bounce back starting next month itself. But, the current mood both in domestic and exports is such that the environment is not encouraging me say that, to borrow from the Discover, “Abhi to yeh sirf chalega, yeh daudega nahi”.

Q: There are a very few companies that benefit from the weakening rupee and yours is one of them. I just wanted to understand in terms of exports realizations that has been driving Bajaj Auto for a while, what have you done this quarter around and what kind of trajectory do you expect to see both on realizations and on volumes?

A: In terms of volumes, we are doing very well everywhere except in Sri Lanka, I don’t want to repeat that point. For example, in April in Nigeria which is our biggest motorcycle market, we grew 29% year-on-year (YoY), last April we sold 22,000 motorcycles, this April we have finished at 28,500 motorcycles.

Motorcycles and three-wheelers in all export markets continue to show good growth and you will see that month after month. In terms of realizations as linked to the forex, we have hedged about 85% or so of our exports with a minimum of 47 to the dollar and with the higher limit, just under 50 to a dollar.

So, we benefit to the extent of 50 to a dollar, which is where the rupee was in February, a lot better than the 44 it was in August. But, as of now we lose out on a potential upside but that is fine in the interest of stable earnings, we have to take some call. So, this is what we have done.

Q: There has been some apprehension on 125CC, some of the analysts have been pointing out that Hero has had a stronger franchise there, we now have Honda also in, plus the industry growth is slightly slowing down as you correctly mentioned, do you think all of this could weigh on that 20-25% market share that you have in the below 125CC segment?

A: Are you speaking about the 125CC segment itself?

Q: Below the 125CC.

A: Both in the 125CC to 150CC as well as in the 150CC and above, in these two segments we continue to be the clear leader with over 40% market share. Some times there is a news out there that somebody’s 125CC sells a little more than ours, this is misleading. For example, with the Discover we have 125CC and 150CC, so our volumes get split between these two. If one took a holistic picture, one would see that Bajaj continues to be the clear leader over there and we haven’t lost any market share there.

In the 100CC, it is no secret for the last twenty years, we have been a laggard, we have been number two, we continue to be number two in the domestic market between the Platina and the Discover 100CC, we sell only 85,000 a month versus let us say the market leader selling maybe perhaps close to 400,000 a month. It is no secret we have to improve our performance there. That is the reason why we have launched a new Discover into the market last month and I will wait till July before I can tell you how that is going, but I am hopeful that that will help us improve our performance there.

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Q: Your overall market share has dipped to about 24% versus 26-27% that you enjoyed a couple of quarters back. How do you plan to scale it back up, because like my colleague was mentioning, there are a whole host of new launches etc. and you yourself have the Pulsar as well that’s getting launched I think in June or so. From this 24% level, what kind of a target do you have on market share say by the end of FY13 or even for the next couple of quarters?

A: For the year as a whole our market share was 25.4% versus 26.7% the previous year. In the last quarter it was 24.5%. This is primarily due to the fact that unlike our two main competitors we have not put any additional stock into the dealerships over and above what we have retailed, whereas they have continued to do so.

This shows up in April itself where our market share is already over 25%. I have no doubt that for example in May when we talk about it on 2nd of June let’s say, I will report to your market share of 26% plus-minus decimal point, because at the retail level we have not lost any market share.

Q: Is it as easy to pass on the price hikes to the consumers as it was say 6-8 months back and are there any more price hikes that you have on the anvil?

A: Obviously, it gets increasingly difficult. Having said that, the only way that a company can make this decision is basis principle. The principle has to be either that the bottom-line comes first or not. For us, the principle has always been that the bottom-line comes first and we have always passed on a large share of the cost.

Sometimes we cannot pass on all of it, but whether it was DEPB 3.5%, whether it was the raw material cost increase till Q3 we have passed on most of it. Our stands as of now will remain the same. Although as of now as I said in Q4 for example, we did not see further escalation in commodities, but if we were to see that or if we were to have some other cost pressures our inclination would be to pass it on. That’s how we are structured. That’s how our business model is structured.

Q: Aren’t raw material costs lower for you? We only know broad global commodity trends and they are steeply lower now. Aren’t pressures lower for you?

A: No, they are not. They are with some materials, but they are not with some others. Also for example, I would not know the exact figure but close to a 1,000 we import from China primarily and some other sources. When it comes to things like the prices of aluminum and when it comes also to the forex, these things do play a role.

We have also had some cost escalation in terms of the chips, transistors that are imported by our suppliers that go into some of our components. While there is no escalation, but as of now we have not seen any significant relief either.

Q: When is the launch of the RE60? You had spoken about a launch in May. Also when are you launching the Pulsar NS?

A: I will take the Pulsar first, because it’s easier. The Pulsar NS will be in the showrooms in Maharashtra next week. We will progressively increase production and it should be all India by July.

Q: What run rate are you expecting to clock on Pulsar NS?

A: In June we are targeting to make 2,500 vehicles and in July I hope we can make whatever we need to make. From August we will also start export. So I think for sometime for the next three-four months we will be just increasing production. Hopefully, I would like to think it will go as far as 10,000-15,000 vehicles a month. It’s an expensive bike, just under Rs 100,000 so we will wait and see. But I am very hopeful.

The RE60 was, yes at one point scheduled for May, but that was a long time back. I have said over the last six or eight months at least that it is now more likely to be launched towards the end of this year. We are on schedule for that now. The product specs are final. The final tests are underway. The plant is coming up nicely at our three wheeler plant in Aurangabad. So we are looking forward to that towards the end of the year.