Bajaj Auto Says Maintaining Margins Tough

Bajaj Auto, India's second-largest bike maker, said maintaining profit margins at current high levels would be a challenge after reporting its profit more than quadrupled in the final quarter.

Bajaj Auto, which is planning to launch a super low-cost car with partners Nissan Motor Co and Renault SA in 2012, beat forecasts with a net profit of Rs 5.29 billion ($117.3 million) for the quarter to March, versus Rs 1.3 billion a year ago.

Its operating margin rose to 22.9 per cent from 14.2 per cent a year ago.

The rise in raw material prices in the fourth quarter had been negated to some extent by robust sales, Kevin D'sa, vice president, finance told Reuters.

However, raw material costs as a percentage of sales -- which had risen to 69.3 per cent in the fourth quarter from 66.2 per cent in the first quarter of last fiscal year -- were still climbing.

"On the material costs, side there will definitely be an increase," he said. "If you take a longer term view and don't look at it quarter on quarter, the margin of 22.9 per cent will be a challenge to maintain."

He said pressure on margins could be offset to some extent by higher margins from more powerful bikes such as the Pulsar and other high-end bikes, and increased exports.

Apart from the Pulsar, Bajaj also sells the more popular 100-cc Discover brand. The two together are expected to sell about 1 million units a year in the near future, the company said without specifying a time frame.

In the March quarter the company sold 712,410 motorcycles, nearly double from a year earlier.

It also sells three-wheelers, and is taking the lead on developing, with Renault and Nissan, an ultra-low cost car to challenge Tata Motor's Nano as the world's cheapest auto.

Last month, larger rival Hero Honda reported forecast beating net profit of 5.99 billion rupees for the quarter but cautioned that rising commodity prices, inflation and interest rates could hit margins in future.

Expansion
Anticipating improving demand Bajaj is spending about Rs 2.5 billion to Rs 3 billion in the current fiscal year to expand its production capacity to 5 million units a year from 4.2 million now, D'Sa said.

Last year its capital expenditure was around Rs 1 billion.

In the current fiscal year, the company is aiming to sell 4 million vehicles, up 40 per cent from the 2.85 million it sold last year. It is expected to sell 3.6 million bikes, up 44 per cent from a year earlier.

For the motorcycle industry as a whole, sales rose nearly 30 per cent last year and is expected to rise 12-14 per cent this year, Bajaj Autos' D'Sa said.

Bajaj Auto's shares, worth nearly $7 billion, closed up 1 per cent while the main index ended up 0.3 per cent.

Its shares have risen about a fifth this year so far.
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