Higher promotion costs may keep Bajaj Auto margins under pressure

Bajaj Auto’s declining margins story continues, with volume gains failing to overcome the drag on profitability on account of a weaker product mix, aggressive pricing and lower export realisations.

Volumes in the December quarter were up 25.8 per cent over the year-ago quarter, led by entry level motorcycles as well as the Pulsars. The company’s overall domestic motorcycle market share was up 400 bps over the year-ago quarter, and has crossed the 20 per cent mark.

Market share gains in the entry-level segment (volumes up 61 per cent) — in which the firm adopted an aggressive stance — have been sharper, up 600 bps to 37 per cent.

This, however, was not able to check the fall in margins. The company reported a 373 bps fall in margins to 15.6 per cent in the quarter, which was similar to the 300 bps fall in the September quarter to 16.8 per cent.

The decline in sequential margins by about 121 bps was on account of lower forex realisations (dollar), falling commercial vehicle volumes, and higher raw material costs on the exports front. 

While Bajaj Auto has been taking price hikes in the domestic markets, it has nevertheless absorbed some of the raw material costs, given the strong market share gains in the African markets (especially Nigeria).

The company has highlighted some tailwinds to support the margins. It expects better export realisations, softening of raw material costs such as steel and aluminium, and a better product mix given upgrades to newer variants such as the Platina 110 and Pulsar 150 neon.

Margin gains in the near term, however, will be offset by its undertaking of a brand campaign (world’s favourite Indian), which will increase the promotional costs in the March quarter. The company is hopeful of better margins in the June quarter of CY2019.

While upgrades to the entry-level and premium products, as well as expected new variant launches are positives, whether the margin and market share gains together can come through, given the market share target of 24 per cent, is the million dollar question.

Given the promotion overheads and higher entry-level motorcycle sales, expect the pressures on margins to stay.