Bajaj Auto’s motorcycle problem

Bajaj Auto Ltd is missing the profitability spark. Ebitda (earnings before interest, tax, depreciation and amortisation) margin in the recently concluded December quarter narrowed from both the earlier quarter and a year ago despite the double digit growth in volume and revenue (see chart).

Margins softened in spite of a better product mix. Thanks to resurgent crude prices, exports recovered sharply. Even commercial vehicle sales, which in general have higher realizations, picked-up. While these two segments—exports and commercial vehicles—drove earnings performance, the domestic motorcycles business remained a laggard. Sales during the quarter increased just 2%.

To be sure, the motorcycle business was challenged by high raw material costs in Q3. But it also faces structural issues. Competition and the lack of steady success with new motorcycles is affecting market share. From around 20% three years ago, the company’s market share in domestic motorcycles market fell to 16.4% last quarter.

To shore up volume, the company increased focus on entry and mid-level motorcycle segments which have gained sales momentum of late. But this also tilted the scales in favour of relatively lower-priced models, weighing on margins. “It (Ebitda margin) came below consensus estimates due to inferior product mix from the domestic motorcycle segment,” an analyst said in a note to clients on the earnings.

The company does have a strong presence in premium or higher-priced models. But growth is lacking. For instance, the Pulsar, Avenger and Dominar models together clocked sales of 173,000 units last quarter, slightly lower than 178,000 units in the year ago quarter.

“Although Bajaj Auto’s performance has improved in volume terms, no participation in the growing scooter segment and failure of recent launches like Avenger & V12/15 remains a concern for us. We await any announcement on future products through their partnership with Triumph Motorcycles UK,” ICICI Securities said in a note. The Avenger and V12/15 models are priced higher than the entry-level segment.

That said, Bharat Gianani, an analyst at Sharekhan, reasons the problem is not so much with the premium motorcycle part of the business but with the entry and mid-level segments which is a large market and where Bajaj Auto has lagged in recent years. With sales in this part (entry and mid-level) of the business gaining momentum the company may maintain volume and revenue growth in the near term. But that also means margins may remain constant or profitability may not improve much, Gianani adds.

Of course, Bajaj Auto’s profitability has historically ranged between 20-22%. The current levels are not that far away. Further they are superior to its two listed peers. But the journey to retrace operating margin to their historical levels will be arduous.livemint