Bajaj Auto torn between profitability and market share

Bajaj Auto's strategy to gain market share in the domestic motorcycle segment has yielded the company the much-needed volumes but it has come at the cost of profitability.

The situation is expected to worsen as the management expects commodity prices to harden over the second half of this fiscal and pressurise margins further.

Bajaj Auto left all its peers far behind in fiscal 2019 as it reported a 28.7% growth in the domestic two-wheeler market as compared the rest of competitors' growth of a mere 2.3%. This was in contrast to the previous fiscal, when the company saw its sales drop 1.3% as against the 13.7% industry growth. Bajaj Auto's market share in domestic motorcycle segment fell 2.3 percentage points from 18% in fiscal 2017 to 15.7% in fiscal 2018, as competitors slowly firmed up their hold with new and focused launches, according to analysts.

Alarmed with the situation, the company's chairman Rahul Bajaj had blamed it on the inadequate performance in the large 'commuter' segment.

Bajaj Auto's financial performance for the quarter ended March 31, 2019, was overall broadly in line with their estimates. However, margins stood at 15.7%, down 370 bps year on year and were flat quarter on quarter, despite a better product mix and slight sequential commodity price relief.

A report by Prabhudas Lilladher said, "Bajaj Auto's strategy to gain market share in the domestic motorcycle segment might have provided the company and its dealers much-needed volumes but at the cost of profitability (margin erosion of 250 bps over FY18-19)."

The margins would remain under pressure on the dismal demand outlook for the domestic industry even in the premium segment, BS-IV related costs in the next fiscal, no incremental growth in the domestic three-wheeler market, according to analysts.

Nishant Vass of ICICI Securities said the strategy of gaining domestic motorcycle market share by aggressive pricing/downward line extension of brands (example Pulsar) is unlikely to be a sustainable-win situation. He said Bajaj Auto should instead focus on regaining its premium category brand ( >150cc) mojo back for its "Pulsar loyalists" as recent product initiatives have centered on down-trading customers in the quest for volumes.

A Chennai-based analyst with a global consultancy firm said that Bajaj Auto will have to take a call sooner than later whether it wants to capture market share at the cost of margins.

However, the company executives are of the view that the sales of premium segment motorcycles continue to be strong. Further, sales of Platina bikes have surpassed that of low margin CT100, which is expected to boost the margins in FY20. Bajaj Auto executives have claimed this year they will be attacking the middle-segment as well entry level bikes as the company aims to grab a market share of 25% in the next one-two years. In the next 6-9 months, Bajaj Auto is expected to launch two new models in the entry segment and another couple of vehicles in the middle-segment within the current brands.

IN NARROW LANE

• Bajaj Auto's market share in the motorcycle segment fell to 15.7% in fiscal 2018 from 18% in fiscal 2017
   
• In fiscal 2018, the company saw its sales drop 1.3% as against the 13.7% industry growth