Bajaj Auto expects to regain its lost market share in the motorcycle segment through strong sales of its Discover variants, said Rajiv Bajaj, managing director.
The company's third quarter earnings were slightly below market expectations. While consolidated net profit was slightly above analyst estimates, adjusted for forex gains, they were lower.
Bajaj said a steep decline in volumes, (-10 percent in motorcycles and -25 percent in three-wheelers), and the company not passing on higher input costs of its upgraded three-wheeler model were the main reasons for the lackluster quarterly performance.
"We did not pass on the upgradation costs, amounting to almost Rs 4000 per three-wheeler and absorbed around Rs 40 crore on that," Bajaj said.
Bajaj said the response to its 100-cc Discover variant launched in October end was good, and the full benefits would be seen in the current quarter.The company is also launching a 125-cc version of Discover in March. Both models put together will help the company recoup the 2-3 percentage point market share loss it has suffered over the last few months.
On the positive side, he said the company was able to hold on to prices despite stiff competition, and benefited from the weakness in the rupee.
"In a highly commoditised and competitive market, we have managed to hold on to our prices; we chose to give up some share rather than play the price game," Bajaj said.
But Bajaj also warned that margins would not benefit from the currency advantage going forward.
On future plans, Bajaj dismissed any talks of entering the scooter segment saying as the market for scooters was barely a third of that for motorcycles.He said getting into the scooter business would be more of a distraction than an effective derisking strategy.
And on a more confident note, Bajaj said the company's market share and volumes have bottomed out in Q3 and will see better days in Q4.
Below is the edited transcript of Bajaj's inetrview to CNBC-TV18.
Q: It has been despite having the festive season in this quarter, your volumes have been a bit of a disappointment, we understand that the industry sales themselves have been sluggish but going forward what is the trend do you see and what are the attempts to arrest the loss of your market share?
A: I think we have managed to somewhat demonstrate that in Q3 itself because from Q2 to Q3, if you look at our domestic motorcycle market share, it is almost flat. Infact, in the so called commuter motorcycle segment, if at all, we have gained a bit of market share, thanks to the launch of the new Discover, which was launched in the 100 cc variant in Q3.
Going forward, as of now, I don’t see any significant signs of revival in the industry itself although we will know better in a few days because good times are supposed to begin from today in terms of the season.
At the same time what I am confident about as far as Bajaj Auto is concerned. This quarter will see the benefit of the new Discover 100 throughout the quarter. It was launched only towards the end of October in the last quarter and that will be supplemented by the new product from the Discover’s table. It is a new Discover 125, which will provide us with the same impetus in the 125 cc segment that the 100 cc has provided us in its segment. This will be launched in the month of March.
So, riding on the back of these two very big launches which are aimed at the middle of the market, the heart of the market, I am pretty confident that we will recover 3 percent market share that we had lost so far in the first nine months of this year. Hopefully we can gain a little more than what we have lost.
Q: I just wanted to come to your margins because if you adjust for the forex gains, your margins stand at around 21.7 percent and there is some skepticism about the fact that your product mix has deteriorated this time around, can you take us through the margin picture for this quarter and going forward what could the trajectory look like?
A: The EBITDA margin as we calculated is 21.1 percent for the quarter. That is not counting the reversal of the mark-to-market (MTM) loss. So, if one take that into account, it is 22.9 but obviously that is not to be considered in terms of talking of a trend of EBITDA. So, in terms of operating EBITDA, it is 21.1.
It is still very much in the more than 20 percent zone that we like it to be. It is true that two significant factors worked against it in Q3- the first one is that the volumes were lower.
If one compares Q3 Y-o-Y, I think motorcycle volumes were down about 10 percent and unfortunately three-wheeler volumes were down 25 percent. This is because the commercial vehicle (CV) industry both in the domestic market as well as in the overseas markets has seen difficult times. So, this volume reduction coupled with an unfavourable mix i.e. CV going down by 25 percent has affected the EBITDA otherwise it would have been higher than 21.1 percent that it was. That is one factor.
The other very specific factor is that over the last quarter we completed the launch of entirely new portfolio of three-wheelers where we have seen a huge upgrade in both the engine and the vehicle.
In fact, it is almost like a new product but we have almost not passed on the price. The cost increase, which is very substantial at about Rs 4,000 a three-wheeler so Rs 4,000 a three-wheeler into about 106,000 three-wheelers for the quarter amounts to a little more than Rs 40 crore that has also been absorbed. These two factors went against the EBITDA.
What favoured the EBITDA is that the market is getting very competitive and therefore, in a sense very commoditized, we managed to hold pricing. So, across our range whether in the domestic or in the international markets, we have held on tight to prices.
We have been willing to shed some share but we do not want to play the price game. So that has been very positive and the other of course has been the rupee.
As in the second quarter once again in third quarter we have realized about 61/USD that has certainly been very good for us given that our exports were about 4,22,000 vehicles. So, that has helped prop-up the EBITDA.
Q: I wanted to come to that because now that most of the currency benefits seemed to have played out because the rupee is back on its appreciation path, can we say that the margins will not cross that 22 percent mark at least in the near future because of the issues you alluded to three-wheeler slowdown etc?
A: I would say yes and no. On account of forex per se, there does not seem to be the likelihood of much of an upside to the EBITDA margin. However, there is one potential upside that hopefully we can leverage and that is the growth of both volume and market share in the domestic market in the Discover segment because Discover operates in a segment, which is quite profitable.
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It may not be as profitable as the Pulsar’s but it is still a very profitable segment in which the mid and upper mid segment of the motorcycle market. I would like to believe that these two launches are going to help us gain incremental volume and market share month-on-month.
In recent months we have seen sales of 150,000-160,000, I think we will make up at least half that gap in this month itself. Hopefully, from February we come back into 200,000 level so if we start gaining 40,000-50,000 motorcycles each month of Discover that can certainly contribute to some upside on the EBITDA.
Q: I just want to ask you, what is your outlook on the export market because market was very much looking into this figure and we saw that 12.5 percent up number came and you clocked around 4.22 lakh vehicles this quarter. What is the outlook for the export segment now?
A: In general, the outlook is positive. You would see if you break that figure up into motorcycles and three wheelers, the motorcycles have grown in very strong double digit. So, we see that trend going forward as well. We know that we have those kind of orders for January and I certainly hope that we can maintain the momentum for the rest of the quarter.
Apart from any other general improvements in markets like those of Africa and Latin, we are hoping to see big gains in the Asian markets, particularly in Philippines and Indonesia where we work with our partner Kawasaki. Especially in Indonesia, where we kind of re-entered the market with them in the last three months and we have had a good response to the Pulsar that we have launched jointly in that market.
I would like to believe that we will continue to see good growth in motorcycles. I don’t see really anything coming in the way of that. Three wheelers have been soft everywhere, particularly so in Egypt which accounts for about 6000-7000 three wheelers of the 25,000 three wheelers that we typically would export.
Hence, we are significantly dependent on that and unfortunately, that is still volatile. So, it is a little harder to make a prediction on the export of three wheelers but I don’t see any reason for it to be lower in this quarter or going forward than it was in Q3.
In Q3 we have bottomed out in terms of volumes and market share both in the domestic and export market.
Q: My colleague started off by asking you about the drop in market share and that has been the key concern that analysts have had and that is perhaps the reason why your stock has fallen 15-20 percent in the last three or four months. I wanted to just talk a little bit about the other segment where Bajaj Auto is not present, the scooter segment. Now that forms about 25 percent of the total two wheeler industry. In the near future is there any scope of Bajaj Auto getting back into the scooter segment?
A: Certainly not. If one looks at Q3, because of the relatively high sales, because Q3 is the festive quarter, scooter sales were a little more than 300,000 a month on an average through Q3.
Motorcycles sales were close to a million and in that motorcycle industry, Bajaj is still only about 250,000 a month. So, where is it that we must focus? Should we try and gain something of an industry size of 300,000 scooters or 750,000 motorcycles? I think the answer is obvious.
If one extrapolates that on a global basis, it becomes even more obvious because motorcycles by volume are 70 percent of all two wheelers sold worldwide. So, this is not the time at all for Bajaj to look at scooters.
It would not be called de-risking of the business, it would be a distraction. From an industry point of view, 300,000 scooters were sold per month on an average in Q3 one single model- the Honda Activa. It has become so successful that it has 50 percent market share.
However, if one looks at the number two player there- Hero’s Pleasure- it is all the way down from 153,000 a month to barely 30,000 a month. Everybody else who is participating there whether it is TVS or whether it is Yamaha or Mahindra it is down to 7000-15,000 vehicles a month.
Unfortunately, this is the problem with marketing. It is not logical, it is counterintuitive. More is not more, less is more. This is the time to focus, to focus strongly on the motorcycle segment and get ourselves well above the 200,000 per mark domestically and keep going as we have been going in the export markets.
Q: Since you do watch your competitors closely then they do themselves sometimes I just wanted your view on what is happening with Honda because they attacked the 100cc bike category quite aggressively with the Dream Yuga, Dream Neo, etc and now there is so much talk about them entering into the premium segment as well and eating into some of your market share, your bikes like Pulsar, etc. What is exactly happening with competition and how are you bracing yourself for the next one year?
A: I am of the belief that we are not part of an engineering industry, we are part of a marketing industry where first mover advantage is everything.
If one looks at what Honda has achieved so far, the reason the Activa is so successful is because it was first to market with a scooter that was unlike any scooter available in India at that time. This was in 2001.
In 2004, Honda came in with the 150cc Unicorn that they still make apparently to take share away from the Pulsar because they do not want to compete directly with Hero. It has been almost 10 years since 2004 and Pulsar still has half that market.
Hence, we cannot but be watching Honda all the time but we cannot fear Honda for no reason at all. If we look further at what is happened with the Dream Yuga and the Dream Neo and over there it is Hero that has the greatest stake.
I have said this before that people won’t move to Honda just because it is a Honda. They have to still give customers a good reason to move away from a Splendor or a Passion to Yuga and a Neo.
If one were to track Honda numbers from October to November to December one would find a very sharp fall in the numbers of Yuga and Neo. So, essentially what this shows is that the Indian customer is a very brand conscious customer. He is currently very pleased buying a 100cc motorcycle from Hero and just because there is a Honda available on the market he is not about to move. That is why, despite the Yuga having been launched almost two years ago and the Neo, it will be a year in May that the Neo was launched what is Honda’s market share over there?
It is not very much and it is falling, it is under a lot of stress. So, the name of the game is to be first to the market with a differentiated product and that is what works in the end.
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