Export slump to end in Q2; plan to enter new mkts: Bajaj Auto

Export markets for Bajaj Auto look very challenging, says company President, Business Department S Ravikumar. But the two-wheeler manufacturer is looking to open up shops in new markets around the world to derisk its export weakness.Ravikumar is confident that the drop in exports could end in the second quarter of financial year 2017. The company is going to review its export guidance of 16 lakh units for FY17 by December.The highlight for the company is the performance of motorcycles in the domestic market, says Ravikumar. He guides for an increase in the market share in the third quarter and says domestic sale would exceed 25 lakh in FY17.He says Platina is doing exceptionally well in the domestic market. Pulsar's entire range will also see an upgrade in the next few months. A new 400cc bike is slated to go into production by November end.Bajaj Auto will maintain 20 percent margin the second half of FY17.Below is the verbatim transcript of S Ravikumar's interview to Reema Tendulkar, Sonia Shenoy and Prashant Nair on CNBC-TV18. Prashant: How would you describe the quarter that has gone by and to your mind, what were the highlights? A: The performance in domestic motorcycles has been the highlight. We recorded 23 percent growth in domestic motorcycles that has played out absolutely to plan and the domestic three-wheelers have also been doing quite well. The average realisation per unit has smartly moved up by almost about 280 basis points (bps) at about more than 62,000 type of a number. So, the mix that shows very clearly the richness of the mixture and all this has helped us to give a nice EBITDA percentage in this quarter almost at 23 percent or slightly sub 23 percent. So that has been the highlight so far. Sonia: Let me start by asking you a little bit about the export market as well because we have seen the export market slip quite a bit this time and you have guided for a 16 lakh unit export target by the end of the fiscal but in the first half of the year, you have done just about 7.5 lakhs, which makes that asking rate of 4 lakh per quarter a bit tough going ahead in the remaining quarters of the year. Would you want to scale down your export guidance purely because of the pressure that we are seeing in that market? A: It looks tough certainly and there are lots of things which are outside of our control. As far as the annual guidance is concerned, we would like to look at it a bit later maybe at the end of December. We are not looking at it right now. The export numbers, the first half versus second half story of the last year, we did almost about 748,000 units in H2 of last year. So whatever substantial reduction or drop in exports that you have been seeing year-on-year basis, that would end with Q2. You would see a flat or a slightly positive export growth coming in the exports in the second half of this current fiscal. Sonia: This is something that you have been telling us for many months now that there will be a recovery in exports but quarter after quarter, we are finding it very hard to see that in the numbers. You did say that you will look at the export guidance in December, what does that mean? That you will review the guidance in December or you are not holding on to that guidance at this point? A: We have to live month by month in the export markets in the given conditions and that is why I said the annual number -- for example in the case of three-wheelers, some of the markets have started behaving okay and more importantly some of the newer markets have started compensating for the loss and exports on some of the traditional markets. So you will see, right from October itself, the three-wheeler numbers clawing back some of the losses. So, we have to honestly see this for a couple of more months before we touch any of these guidance numbers. Reema: With the pickup in your domestic motorcycle business plus the onset of the festive season, what are domestic volumes going to look like in the quarter that we are in, in Q2 you had volumes of about 6.5 lakh units, any sense of how Q3 numbers will look like? A: I am very happy to talk about the domestic numbers now where in the first half we have done good market share gain in that, almost all the products are doing quite well. Recently, Platina has been doing exceptionally well but more importantly, in Q3 itself that is in the next couple of months, we are going to see some major product initiatives from the company. The entire Pulsar range is going to get upgraded, they are going to rollout. In the very successful V platform, we are going to see the second offering that is going to come out. That will be adding a lot of impetus in that segment and our all new 400cc bike is going to come out also in this quarter. There is a lot of product action in this quarter on the back of which, our market share will further improve and honestly because these are some of the new and important launches, we would see them play out. Our market share should improve further and we will have a full quarter benefit of that going forward in Q4. So, our exit market share should be substantially better even from where we are standing today.Sonia: In the first half of the year you have done about 12.5 lakh domestic motorcycles, if we go by the exact same run rate do you think you could exit the year by about 25 lakh domestic motorcycle or could it be more than that? A: I think we should be doing more, we should be more than that, we should certainly be more than that, because market share typically we are at about 20 percent or so, exit market share should be somewhere around 23-23.5 percent at least. Sonia: But you have guided for around the same levels, so I guess exit market share would be flat compare to what you had guided for earlier. Your peer Hero Motocorp was telling us in the conference call to analyst yesterday that the second half of the year could throw up some pressure for margins, because of the way commodity prices are rising especially steel. This time around you have done margins of about 21.3 percent. Do you think you could face some pressure in the second half? A: I should tell you again the mix is going to be substantially better in our case. As it is if you see the Pulsars have done well, Avengers have done well, Vs have done well and in export our focus has been to maintain and improve the market share while not losing on profitability and the current currency dollar rupee rates have been holding quite okay. I think certainly our benchmark 20 percent EBITDA plus that should certainly be there in the second half as well. Prashant: Just to go back to that point you have lots of new products coming up the all new 400cc, what is the total production cost for the 400cc bike and how that compare to some new line which is in the economy class? A: It is all new product and typically the full product development including the tooling cost etc will be somewhere around USD 6-7 million, it will be around that range if I fully load the engine costs, but there are platform synergies which are there it should be sub that. Prashant: The point about pushing volumes when you launch new products you have the help, the tailwind interest and buzz around new products and you can drive sales, but from the existing products all original equipment manufacturers (OEMs) have been reporting all time high monthly sales volume numbers, but there have been some who pointed out that while factories are pushing out more especially in the festive season, at a retail level things may not be all hunky dory, you have to give more discounting etc, etc. So just tie that point what Sonia said earlier that commodity prices have moved up, so you that pressure to take maybe prices higher, but at the same time if the market is not very recipient will you be able to kind of manage your margins? A: Number one we are very confident of managing the margins at 20 percent plus EBITDA levels and of course the steel has started moving a bit up and it is not very big cause for alarm as far as we are concerned. Much more importantly all the existing models whether it the CT or the Platina or the Avengers or the V they are all continuing to do well. Our three-wheelers which is a very big margin contributor that is doing exceptionally well and we are gaining market share in that. Exports we are realising USD 67 and going forward the mix is going to get even richer with new Pulsars with the 400cc of course and another model coming in the V platform. The three-wheelers again we think that there is going to be some benefit from some new permits which are going to open up and the cargo is also going to gain some more market shares - - that is why I said 280 bps improvement in average revenue per unit (ARPU) that we have displayed in this quarter. Everything in Q3 and Q4 is going to point out to a better mix, richer mix and on the back of that I think we should be quite okay as far as margins are concerned. We should be able to control and manage any cost increases that come by. Sonia: When is the 400cc launch, all eyes are on that, but we hear from channel checks that there are technical delays? A: The product is going into production from end of November and it will be launched soon after that. Reema: Would you look at cutting prices to drive export sales, purely export markets? A: The type of impact that the currency in Nigeria and Egypt have had - - I don’t think it is going to be overcome by just from marginal price cuts, but in all these places our market shares are moving up. We will open up new markets to de-risk this type of story and our profitability will be quite intact, some marginal adjustments that are called for can always be made, but we will keep our eyes very sharply fixed on also the money that we make on exports. Sonia: Finally then would you want to leave us with any kind of realistic expectation on what the end of the year could look like as far as volume growth by the end of FY17, what will the volume growth be for Bajaj Auto? A: Let’s not finish all the topic now itself let wait for couple of more months, because honestly you should give us the benefit of these product launches which are very important, how they are received in the market. We should have a feel for that because these things can really help us in making a correct projections going forward.