Product Mix Helps Bajaj Auto Hold on to Margins

Despite facing pressures on the raw material front like every other automaker, Bajaj Auto has managed an operating margin of 20.5 per cent in the fourth quarter. Although this may be lower on a year-on-year basis, (margins came in at 22.8 per cent in the fourth quarter of 2009-10) the company has, in all four quarters of 2010-11 maintained its operating margins at around the same 20 per cent.

Bajaj Auto’s ability to hold on to profit margins comes from two factors. One, its strong brands in mid-to-premium motorcycles segment. Two, it also has a good hold on the three-wheelers market where margins are in excess of 30 per cent. Besides, the company derives over 25 per cent of revenues from exports where margins are higher than 20 per cent. This unique positioning has also meant that the company has enjoyed good pricing power and has been able to pass on a major portion of cost hikes to customers through periodic price increases.

Moving forward, Bajaj may look to continue its current run on the margin front. Bajaj has already effected price increases both in the domestic and export markets in April-May this year, and this may provide some support to margins over the near-term. With prices of metals 15-20 per cent lower than their February highs, a flattening of commodity prices may also help as the company has reportedly renewed its raw material contracts in April. What may however, pose a bit of a challenge to the company is the possible withdrawal of the DEPB scheme, affecting its export profitability.

But what would remain a bigger challenge is sustaining the volume growth. After two successive years of high growth, the Society of Indian Automobile Manufacturers (SIAM) expects auto industry growth to settle at 12-15 per cent. The company, after growing by 34 per cent in volume terms in FY11, expects to grow by a higher 20 per cent this fiscal. While it remains to be seen if Bajaj can meet its expectations, what could support volume growth is the line-up of launches at aggressive prices.

The Discover 125cc targeting the commuter deluxe segment where there is less competition from Hero Honda (Super Splendor and Glamour) has been launched recently. The 150cc Boxer at a highly competitive Rs 40,000 as well as some Pulsar upgrades are to be introduced shortly.

Besides, the company is also bringing in new Kawasaki and KTM bikes (premium segment). At a time when interest rates are rising, an added advantage for Bajaj (that would keep its volume ticking) is also its 50 per cent market share in the 125-250cc bikes category, where the buyers are generally less rate-sensitive.

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