New Delhi/Pune: Bajaj Auto Ltd, India’s second largest two-wheeler maker, said net profit for the first quarter ended June declined a worse -than-expected 22% from a year ago as customers avoided or deferred motorcycle purchases due to higher lending rates. The company said it expects an improvement in profitability and market share in the second half of fiscal 2008 as it launches a new motorcycle.
Bajaj’s net profit in the quarter declined to Rs195.7 crore from Rs251.6 crore a year ago. This figure includes the losses of its insurance subsidiaries. On a stand-alone basis, the automotive operations declared a net profit of Rs226 crore.
The decline, for the second straight quarter, was worse than that, estimated by six analysts polled before the results. They predicted an average Rs248 crore net profit. Sales at Bajaj Auto fell about 4% to Rs2,206.4 crore in the quarter as it sold less two-wheelers than a year ago. In the same period of the previous year, the revenue was Rs2,294 crore.
After years of double digit growth rates, sales in the world’s second largest two-wheeler market fell 9% in the quarter to 1.7 million units as lending rates, which have risen by as much as 5 percentage points in the last year, forced prospective customers to defer purchases.
“It should move up in another two months as the festival demand will be visible,” said K.K. Mital, a fund manager with Escorts Asset Management Ltd. “The outlook on the monsoon is good and agricultural produce should be okay and these will help too.”
Around 50% of the nearly seven million two-wheelers sold every year in India are bought by rural consumers. The rural population in the country depends on agricultural output and a robust harvest to fund their purchases. Traditionally, timely monsoon rains ensure a good harvest. Indian also tend to buy more of their durables during the third quarter of the year, coinciding with Hindu festivals such as Diwali and Dusshera.
Raw material costs
Rising expenses are squeezing the operating margins, a key measure of profitability, of two-wheeler companies. Bajaj’s operating margins fell about 3 percentage points to 13.2% in the first quarter from a year ago, as prices of raw materials such as steel and nickel rose. The price of cold-rolled steel coils, used extensively in auto manufacturing, has increased 7% to Rs39,000 per tonne over the last three months, according to data from a government arm, the joint plant committee. Operating margins measure how much profit is left after deducting the basic expenses of running a business.
Margins were under pressure due to a competitive pricing environment,” said a statement from Bajaj. “Rising input costs and the overall decline in volumes” contributed too.
“As volumes pick up, margins too should improve”, said Huzaifa A. Suratwala, analyst with Networth Stockbroking Ltd. “Much depends on the launch of the new bike.”
Bajaj has not disclosed the details of this new bike.
“With the launch of the new motorcycle in September 2007 and a richer product mix, the company anticipates improvement in its marketshare and profitability in the second half of 2007-08,” Bajaj’s statement said.
Bajaj has increased the prices of its Platina and Discover models by Rs500 at the beginning of the second quarter to improve profitability.
Shares of Bajaj Auto closed up 3.1% at Rs2,194.8 on the Bombay Stock Exchange.
Separately, at an annual general meeting, Bajaj Auto indicated it may consider closing less productive units such as its oldest manufacturing facility at Akurdi in Pune.
Replying to a shareholder comment that the company should sell off its assets, approximately 250 acres, at the Akurdi plant since production is falling steadily, managing director Rajiv Bajaj came out strongly in favour of the move.
“I would like to shut down the plant too. We produced 4,50,000 vehicles from here two years ago, last year we did 3,50,000 units and this year we expect to do 50,000 units,” he said.
The Akurdi plant manufactures the 125cc Discover bike and the 95cc Crystal scooterette.
It used to make Bajaj’s legendary Chetak motorcycle which dominated India’s two- wheeler business for decades. The company does not make the Chetak anymore and has decided to manufacture only high-margin, low-volume scooters in the future.
Bajaj, who spearheaded the company’s decision to set up the company’s new, lean manufacturing facilities for motorcycles at Chakan near Pune a few years ago and later steered the company’s first investment out of Maharashtra, at Pantnagar in Uttarakhand, said the employee productivity ratio did not add up.
“Our Pantnagar plant will make a million vehicles and employs just 500 people while Akurdi will make only 50,000 vehicles this year and has a 2,200-strong workforce”. Bajaj was, however, quick to point out that the move was not as easy as it sounded. “It is not easy to shut down a plant in India. No one can shut down a plant till it is sick,” he said referring to existing labour laws in the country.
Later, Bajaj Auto chairperson Rahul Bajaj seemed to be distancing himself from son Rajiv’s comments on the sensitive issue. While Akurdi and even its facilities at Waluj in Aurangabad, Maharashtra, has seen production decline, he pointed out that the group has a large workforce at the two centres. “We have offered several voluntary retirement schemes for the workforce but there are no takers for it,” he said.