After clocking a strong EBITDA margin of around 20 per cent in all the four quarters of 2010-11, Bajaj Auto's first quarter (Q1FY12) margins have come in a tad lower at 19.1 per cent.

This is not surprising, considering that the management had earlier indicated that margins would take a hit in this quarter due to recent renegotiation of raw material contracts. However, the company expects margins to be stable, going forward. This may well be true as Bajaj Auto's superior product mix gives it the ability to hold on to profit margins.

The company has strong brands in the mid-to-premium motorcycles segment where realisations are better than the commuter segment; it has a good hold on the three-wheelers market where margins are in excess of 30 per cent; and it derives over 25 per cent of revenues from exports, where margins are higher than 20 per cent. Given the strong export demand, the management has hinted at price increases to these customers in the current quarter.

Challenges

That said, the maintenance of the margins at these levels is not without challenges. A possible withdrawal of the DEPB (export incentive) scheme post September this year , might play spoilsport and dent export margins.

Bajaj Auto is the largest player in the two- and three-wheeler export market with a 63 per cent and 85 per cent share (volume terms), respectively. Another challenge is the rising interest rates and an expected moderation in auto industry sales. Though Bajaj Auto expects to grow at 20 per cent this fiscal (inclusive of exports), the first quarter volume growth came in only at 18 per cent year-on-year.

While it remains to be seen if Bajaj can meet its own expectations, what could support volume growth is the upcoming festival season and launches such as the Discover 125cc (commuter deluxe segment), the 150cc Boxer and Pulsar upgrades that would be introduced shortly.

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