Bajaj Auto sees new launches, higher exports pushing up profit margin next year

Pune-based Bajaj Auto registered two-wheeler sales of 188,196 units, a growth of 7 percent in domestic sales in November as against 176,337 units sold in the same month last year. (Image: Bajaj Auto)

Having been punished by the street for its aggressive strategy to garner market share at the cost of profitability, Bajaj Auto said it is expecting its operating profit margin to improve next year.

New product launches in the sports and commuter segments, coupled with a continued focus on exports, will help the company pare margin losses in the entry-level segment, in which it sells the CT 100 model.

The company's stock has fallen nearly 12 percent since the beginning of the current financial year. It was trading at Rs 2,480 on October 25, down from Rs 2,808 on April 2.

Notably, six months after it brought down the price of the CT 100 by Rs 2,000, thereby kicking up a price war in the entry-level bike segment, Bajaj Auto hiked the model's price by Rs 1,800 on October 1.

Nevertheless, the CT 100 remains a loss-making product for the country's third largest two-wheeler maker.

Bajaj Auto's operating profit for the September quarter fell to 18 percent from its traditional benchmark of 20 percent. This was the second quarter in a row where the company's margin was well below its historic levels.

As a result, the automobile major's net profit for the quarter grew only 3.65 percent, way slower than its revenue, which rose nearly 22 percent.

The CT 100 makes up 36 percent of Bajaj's total domestic sale volumes but only brings in only 14 percent of its revenue.

After the price drop in March this year, demand for the entry-level model shot up significantly, making it the market leader in its segment.

At the same time, demand for another entry-level bike -- the Platina -- which is more expensive than CT 100, rose at a similar pace.

So the company's focus in the coming 4-6 quarters will be on ramping up volumes of the Platina, as well as on launching new models in the premium Pulsar segment and in the 125cc commuter segment.

Speaking to analysts Kevin D’sa, President (Finance), Bajaj Auto said: “We are talking about the next one and half years. The M1 segment we have the CT 100. But we see Platina picking up traction in the near term. And right now the CT100 is loss (making) proposition but the Platina is in the profitable zone. So within the M1 segment we see Platina becoming a bigger pie. As we go forward you will also see us focusing a lot on the sports segment. As a family we should be doing around 90,000 from 75,000-80,000 a month."

"In the short-term in the domestic space the margins will be balanced out with growth in the high margin sports segment and Platina evening out at the lower end of the segment. But as we talk about one or one and half years there will be more products coming in primarily in the M3 segment. So overall domestic margins should go up because of this mix changes. Next year motorcycle profitability will be higher than this year," he said.

Thanks to the price cut, Bajaj's market share during September rose to to 20 percent, its highest level in four years.

The CT 100 commands a share of more than 50 percent in the entry-level bike segment, where it faces competition from the Hero HF Dawn.

Company officials have said that capital expenditure remains unchanged at Rs 300 crore for the year, which will be spent on new product development, research and development, preparation for Bharat Stage-VI and de-bottlenecking of production processes.