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B. Krishnakumar

BAJAJ AUTO'S performance for the quarter ended March 2005 reflects the business environment in the two-wheeler industry. The company reported a 28.3 per cent rise in turnover and a 29 per cent jump in gross profit during this period.

The company reported an impressive 51 per cent jump in motorcycle sales volume. This is explained by the pick-up in the demand for bikes in the entry and premium segments of the market. The success of the CT 100 and the steady offtake of other models such as Discover and Pulsar played a key role in bolstering the motorcycle sales volume.

The lag in turnover growth in relation to volume growth is on account of the change in product mix in favour of the lower-value CT 100, while the company sold more of the upper-end Pulsar model the year before.

The drop in three-wheeler sales by 11 per cent also played a part in pulling down the turnover growth. The non-issuance of permit for the three-wheeler goods carrier in certain States, along with the growing competitive pressure, resulted in a slowdown in this product segment.

The firm trend in steel price and the rise in advertisement and sales promotional outgo, along with the change in the method of accounting for product warranty, affected the operating profit margin. The `other income', consisting of treasury income and export incentives, almost doubled to Rs 126.6 crore from Rs 64.3 crore. The effect of the spurt in income from other sources was offset by the sharp increase in taxation provision. As a result, the profit after taxation rose in sync with the turnover growth.

Bajaj Auto's performance would depend on the success of the launches. It plans to launch two motorcycle models in the near term. One of them, the Avenger, would be positioned in the premium segment and the other, yet to be named, at the entry-level. Avenger would be a stripped-down version of the erstwhile Eliminator.

The company's performance over the recent quarters indicates that it has managed to log volume growth by gaining market share; the profitability has, however, been under stress owing to competitive pressures and the growing proportion of lower-value models in the product mix. Though the growth in volume is essential, the company needs to get its mix right through a better presence in the executive bike segment, the biggest market.

On the positive side, the company's presence across almost all segments of the motorcycle market is a major source of competitive strength. This advantage is, however, tempered by other factors. For instance, Bajaj is seeking on increasing contribution from the executive bike segment with the launch of Avenger. However, competitors such as Hero Honda, Honda Motorcycle and Scooter, TVS Motor and LML plan to launch models in the same segment as well. These factors would only aggravate the competitive environment in the industry.

In the three-wheeler market, there appears to be growth potential, especially in the goods carrier segment. Bajaj, however, would have to contend with competition from Piaggio and Mahindra & Mahindra in this market. In the scooters segment, Bajaj continues to face difficulty in gaining market share. Honda Motorcycle's Activa continues to dominate the ungeared scooter segment. It remains to be seen if the launch of Wave will help Bajaj reverse the tide.

In the near term, profit growth may continue to lag volume growth. While the company has a 50 per cent jump in motorcycle sales for May 2005, it is unlikely to translate into a proportionate jump in profits as that of CT 100. The offtake of higher value models such as Discover and Pulsar does not appear to be as robust as the CT 100 model.

The growing income from the insurance business, the thrust towards overseas market and the ability to launch models at regular intervals are the other positive factors from a long-term perspective. Still, taking into account the recent run-up in the share price and the limited scope for growth in margins, investors may lock into profits by selling their holdings. Exposure can be considered on the evidence of the success of launches, Avenger in particular.

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