Bajaj Auto: Not 'profitable growth'

Bajaj Auto's operating margins have taken a beating

Bajaj Auto, for some time now, has been harping on "profitable growth", but last year's growth was anything but.

The company's strategy in the recent past has been to concentrate on the executive and premium segments of the motorcycles market, the three-wheeler segment and the exports market. These are the most profitable divisions for the company.

Sales figures for the previous year just confirms this shift in focus - sales from exports jumped 66 per cent, Pulsar (premium segment) grew sales by 60 per cent and three-wheeler sales grew by 18 per cent.

Sales of scooters, scooterettes, step-thus and the like fell over 30 per cent. For perspective, these segments accounted for 31 per cent of Bajaj's two-wheeler sales in FY03, and their contribution has now fallen to just 21 per cent.

The decline in sales of these segments pulled down overall volume growth to just five per cent. However, because of a better product mix, revenue growth was much higher at 14.1 per cent.

But this growth was not profitable "" operating margin fell almost 200 basis points. And as a result, growth in operating profit was a mere 2.2 per cent, much lower than the 14 per cent growth in revenues. The spanner in Bajaj Auto's works was the jump in raw material prices last year.

In particular, higher steel and aluminium prices led to a 260 basis points jump in raw material prices as a percentage of sales.

Besides, exports now account for 11 per cent of revenues and the appreciation of the rupee also hit profitability in that segment. On the other hand, it made savings of 60 basis points in staff costs, thanks to its VRS programmes.

Going forward, the focus will continue to be profitable growth. Nevertheless, Bajaj Auto has lined up a launch in the less profitable entry-level segment this month.

The idea is shore up volumes in the segment which took quite a beating last year, after the launch of CD Dawn by Hero Honda at a lower price.

But what analysts and industry observers are really looking forward to is the launch of "K 60" in the second quarter of this fiscal.

This bike will be positioned in the executive segment and will compete with Hero Honda's Splendor and Passion. Bajaj's earlier launches in the segment, "Caliber 115" and "Wind 125" have not quite achieved success and Hero Honda continues to dominate this segment.

But, apparently, the K 60 is a technologically superior bike and is substantially different (technologically) from the usual 100 cc, 4-stroke offerings.

Whether the launch helps Bajaj capture market share from its main competitor remains to be seen, but thanks to the diversification with exports and three-wheelers, sales growth could still be above that of industry.

With contributions from Mobis Philipose