Mumbai: India’s second largest two-wheeler maker Bajaj Auto Ltd on Thursday reported its best operating margins for the quarter ended September, signalling that managing director Rajiv Bajaj’s strategy of focusing on high-end bikes and premium segment entry-level motorcycles is paying off.
Bajaj Auto’s net profit vaulted 117% to Rs403 crore, beating Street expectations for the second quarter in a row as it sold more Discover motorcycles and exports rose.
Operating margin expanded to 22% from 13.5% a year earlier as sales increased 14.62% to Rs2,887.51 crore from Rs2,519.18 crore. Bajaj Auto’s rival Hero Honda Motors Ltd, which sells two of every three bikes in the country, has on an average been reporting an operating margin of 14-17%.
Graphics: Yogesh Kumar / Mint
Bajaj sells the Discover 100cc, introduced in mid-July, at a premium of Rs800-8,000 to rival Hero Honda’s CD Dawn and Splendor models. The company sold 160,000 units of Discover and a greater contribution of bigger displacement bikes from the Pulsar range also helped margins.
In October 2006, Bajaj had announced plans of exiting from the 100cc segment as it was not “making money”. The new Discover is produced at the firm’s unit in Uttarakhand that offers excise duty benefit. As volumes grow, the firm will be able to leverage the benefit better. It gained from lower expense on raw materials such as steel and aluminium.
The quarter has been by far the best for Bajaj Auto in terms of sales, export volume, net profit and operating margin, the firm said. With 81,000 units exported in September, it’s likely to exceed the annual target of 800,000, the firm said.
Despite the stellar performance, Bajaj Auto shares lost 3.37% on the Bombay Stock Exchange to close at Rs1,554 apiece as investors booked profits. The bellwether equity index, the Sensex, lost 0.21%.
The company attributed the success to the strategy of focusing on the more profitable category of “bigger and sportier” motorcycles, reflecting in higher operating margins.
Sales of the “newly launched Discover have been surprising”, said Joseph George, analyst at BNP Paribas Securities Ltd. Bajaj Auto’s sales grew 7% to 686,727 units in the quarter. Of this, exports made up 224,334 units, up 8% from a year ago. Exports typically offer better realization than the domestic market. Though the firm believes sequential improvement in volumes backed by newer products will help it offset the impact of rising steel and aluminium prices, not all analysts are convinced that it can do so.
“Margins might come under some pressure due to higher raw material costs,” said Umesh Karne, analyst at Brics Securities Ltd. “After the third quarter, they will have to re-negotiate their contracts.”
Mahantesh Sabarad, an analyst at Centrum Broking Ltd, doubts whether the volumes are sustainable as “what we are seeing now is a function of postponed demand from last year”.
First Global Securities Ltd believes the second half will be better for Bajaj Auto on the volume and margin fronts. “The company will benefit from lower input costs and also record an increase in export revenues on the back of its new launches,” First Global said in a report released on Thursday after the firm announced its earnings.
George said with Bajaj Auto’s forward contract booking concluding by the end of fiscal 2010 and the rupee appreciating, margins will taper off from fiscal 2011. The rupee appreciated 0.42% to Rs48.11 in September from June. On Thursday, it closed at 46.24 a dollar, after hitting 45.81.
While Hero Honda has adopted a volume strategy to retain its leadership position in the two-wheeler market, Bajaj Auto has been operating in the higher-end segment to have a competitive edge. Hero Honda, which reports earnings on 21 October, is also expected to report a much better margin than the previous quarter.
Reuters contributed to this story.