Bajaj Auto: Poor volumes mute profit growth

The mere 4 per cent sales growth and flat profits of Bajaj Auto in the first quarter is a reflection of the dwindling fortunes of the two-wheeler industry in recent times.

Industry volume growth (domestic), which stood at 17 per cent in the April- September 2011 period, slowed to 11 per cent in the second half of last year. In the first quarter of this year, it has grown at about 10 per cent year on year. Bajaj’s performance has been worse than the industry, with its motorcycle volumes shrinking by about one per cent in April-June 2012.

Sluggish volumes

Unlike its peer Hero, which leads the market in the entry and executive segment bikes (75-125 cc), Bajaj has a stronger portfolio in the 125-250 cc category (Discover 150, Pulsar 135, 150, 180, 220, Avenger 220). It has about 50 per cent market share in this segment. Consumer preference for lower segment bikes, thanks to higher interest rates and petrol prices, and a delay in the launches of the Discover 125 ST and the Pulsar 200 NS have been the reason for the shrinkage in volumes.

Besides, two other segments that could have helped boost volumes and realisations are three-wheelers and exports. But a delay in the expected opening up of permits for auto rickshaws in some States and a rise in import duties in key markets such as Sri Lanka has played spoilsport on these fronts.

Silver lining

One good aspect of the results is that the company has managed to hold on its profit margins at about 18 per cent, despite the sluggish volumes. A lowering of raw material to sales ratio from 74 per cent to 72 per cent and two price hikes effected during the quarter has helped. This apart, its low fixed cost structure (fixed costs form less than 10 per cent of total costs) could have come in handy too.

Way forward

Going forward, while launches may drive volume growth to an extent, there are no immediate triggers for the domestic market to recover, at least in the second quarter. However, the company expects exports to normalise in the next one or two months. This will help boost volumes and realisations.

Published on July 18, 2012

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