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The Rediff Interview/ Sanjeev Bajaj, vice president (finance) Bajaj Auto

'We do not expect a price war'

It also embarked on aggressive cost cutting measures to improve efficiencies.

For the second quarter of this fiscal, profit before tax and extraordinary items jumped about 72 per cent to Rs 203 crore (Rs 2.03 billion). Operating margins grew from 14.8 per cent to 18.6 per cent during the period. Is this growth sustainable?

Sanjeev Bajaj, vice president (finance) in conversation with N Mahalakshmi.

Your profit margins have been growing steadily over the past few quarters on the back of internal cost cutting measures. How much more are you expecting to gain in the ensuing quarters?

The increase in profit margin is a function of both cost-reduction efforts initiated by the company and a richer mix of the product portfolio.

For example, in the motorcycle segment, the company's premium product Pulsar now forms a significant proportion of the total sales.

From around 12000 numbers in the first half of 2001-02, the company sold around 26000 numbers in the first quarter of 2002-03 and around 41000 in the second quarter of 2002-03. Further, the growth in three wheeler sales of the company are encouraging.

On the subject of cost cutting, the company has in place well defined plans in the areas of supply chain management, value engineering, conversion costs and pruning of fixed costs. The progress of these plans is reflected in the quarter-on-quarter increase in operating margins.

The company has also completed a voluntary retirement scheme in the second quarter of the current financial year. The savings in employee cost on this account will be reflected in the ensuing quarters.

Last three years have witnessed a rapid growth in the two wheeler segment, particularly in the motorcycle segment. What's the two wheeler (also motorcycles) penetration level in the country at present? What kind of growth do you expect in the next 2-3 years?

While official figures are not available, we believe the penetration level for two wheelers in India is in the region of 28 to 30 vehicles for every 1000 people.

Our internal analysis, indicates that the two wheeler industry should grow by 8-10 per cent over the next two to three years. Within the overall growth of the two wheeler market, we expect the motorcycle and the ungeared segment to outperform others.

With competition increasing in the industry, what's you strategy to maintain growth?

The key strategy of the company has been to assess the specific requirements of different types of customers and create products that exceed their expectations.

Towards this, as a first step, the company introduced the "Boxer" range of products in the entry-level segment of the motorcycle market.

Subsequently, to differentiate it from the competition, the company introduced the Boxer-CT range with K-Tec engines which offer better pick-up and higher mileage.

The company's assessment also revealed that there exists a category of customers who were tired of the existing products and wanted an exciting range of vehicles which offered power, performance, features and superior looks. Moderate fuel efficiency would suffice.

So we launched the Pulsar in November 2001 and today it is the largest selling brand in the premium segment. The company plans to grow further in the executive segment of the motorcycle market by launching a 125cc "World Bike", developed jointly with Kawasaki. It will also enrich features of its current product range -- the Caliber and Croma -- to gain further market share.

The company also intends to create a completely new segment in the market with its "BYK", a 100cc motorcycle. This product is expected to attract a whole new set of young and first-time buyers of two wheelers.

But won't this cannibalise your existing products?

No, since it targets specific customer requirements which existing bikes do not satisfy.

Are you expecting/ prepared for price wars going forward? How will this affect your bottom line and how will you guard yourself?

We view the current trend of price cuts as a realignment of prices to reflect the inherent value of the product. Looking ahead, we are of the opinion that price per se will not be the only factor considered while purchasing two wheelers.

The customer today is discerning and demands features, reliability and technology. We will harness our strengths in these areas to consolidate our market share.

Given the healthy growth rate for the two wheeler industry, we do not expect a price war.

Exports performance has been impressive till now. What contribution from exports are you expecting over the next two years?

We had set ourselves an export target of 75,000 two and three wheelers in the current fiscal compared with export volumes of 44,311 last year. Looking at our half yearly performance where we exported 40,329 vehicles, we are now targeting cumulative sales of 85,000 in the current year. Looking forward, in the next three to five years, we would like to set ourselves a target of 10 per cent of the total sales coming from exports.

What are your capex plans for the next one year? What is the logic for holding over Rs 2,500 crore (Rs 25 billion) as investments largely in financial assets? Won't it make more sense to reward shareholders by way of healthy dividends or a buy back?

We anticipate a capex of Rs 150 crore (Rs 1.5 billion) in the next year. This amount would be spent on capacity enhancements where required, product upgradations, replacements and modernisation.

Two years ago, the company returned a part of its surplus funds to shareholders through a buy-back of 15 per cent of the share capital, involving a total pay-out of Rs 720 crore (Rs 7.2 billion). In the previous year, the company declared a dividend of 140 per cent, which included a special dividend of 20 per cent.

The special dividend was to distribute part of the one-time premium received on the company's insurance foray. Hence, the company is conscious of its responsibility to its shareholders and is discharging the same diligently.

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