What’s driving Bajaj Auto’s profitability?
What’s driving Bajaj Auto’s profitability?

It comes as a surprise when Bajaj Auto, the fourth largest two-wheeler maker and largest three-wheeler maker in India by volume has outpaced its top rivals in terms profit margins.

Though, its operating profit margin came down to 16.45 per cent in FY19 compared to 19 per cent in FY18. India’s largest two-wheeler maker Hero MotoCorp’s operating margin remained at 14.65 % in FY19, down from 16.38 % in FY18.

Bajaj Auto with a market share of 12 per cent (in two-wheeler) saw 18.5 per cent growth in profit (of combine business 2W+3W) to Rs 4,675.18 crore in FY19 as against Rs 4,068.10 crore in FY18.
The company’s profit margins are likely to remain the same in the near term. According to Bharat Gainani, Research Analyst, Angel Auto, the exports are getting offset by discounting and aggressive pricing in the domestic market. The last quarter saw around 15 per cent of operating EBITDA margin and may remain the same for some time.

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So, the eventual question remains – how?

We, at ET Auto have looked into what contributed to the health profitability. Hence, we found three major reasons that is driving the profits are company’s lean manufacturing strategy (increases efficiency and reduces defect in parts per million – PPM), exports, expansion of premium bikes. Three-wheeler has been another major contributor to the bottom line.

The entire business has been structured in a way which has helped them grow says Rakesh Sharma, Executive Director, Bajaj Auto, Since 2010 the auto maker has been able to increase productivity of its workforce by 10 times and also brought down the cost of production significantly.

Few years ago, Bajaj Auto shifted its focus on boosting top line by 100 per cent and a bottom line to 10 per cent. The company claims that it analyses the expenditure, and the way they drive productivity through leveraging the concepts like PPM which has helped drive a high level of productivity in operations.

As a result, inventories for finished goods reduced and the number of rejected items was down from 20,000 parts per million (PPM) to less than 2,000 PPM.

“This (PPM) helped keep the entire operation from both the spectrums in a very highly productive state and as a result the cost is down, informs Sharma.

Beyond this what worked is the structure of business mix and geography mix along with the focus on high level of productivity is instrumental in keeping the profitability to be the best of classRakesh Sharma, Executive Director, Bajaj Auto

“Beyond this what worked is the structure of business mix and geography mix along with the focus on high level of productivity is instrumental in keeping the profitability to be the best of class,” said Sharma.

Other than the structural aspect, the company’s penetration in premium segment with diverse product portfolio has also helped in profits. Premium segment has higher margins thus impacts the level of profitability than the non premium segments.
At present, Bajaj has partnered with KTM, Husqvarna and Kawasaki to focus on 250 cc – 750 cc segment. To further increase the sales volume in premium segment, Pune-based motorcycle manufacturer tied-up with Triumph Motorcycles.

In terms of margins, industry analysts’ estimate, the primary reason behind the healthy bottom line is the high margins coming from three wheelers i.e 25 per cent. While the mass motorcycles margins are 7-8 per cent and premium segment margins stand 15 per cent.

This is the reason Why Bajaj Auto operating margins stand at 16 percent while the competitor Hero MotoCorp operating margin stand at 14 percent which primarily deals in mass segment with entry level motorcycles and scooters.
Talking about the top line, premium segment contribute only 2 per cent while the three wheeler accounts for 15 percent and exports contribute whooping 42 per cent of the total top line.

Bajaj Auto, the largest exporter from India, has got this as major profit booster.

The home-grown automaker has established scalable presence outside India including Africa, Latin America and Saudi and around 40-45 per cent of the business comes from overseas. The company has winning situation in Latin America, where buyers prefer it over cheap Chinese alternative in the mass and affordable segment.

Bajaj’s exports have been highest in two-wheeler segment, giving a boost to overall revenue as well as profitability. In the year ended March 31, the company exported 1,695,553 units.
According to analysts, recent appreciation of foreign currency and government’s incentives to exports attributed to the increased valuation from exports. Bajaj Auto has gone against the general trend of not making scooters even as the segment saw a surge in the last few years.

The company is focusing on bringing in electric vehicles and they are developing prototypes across the bay. Recently, the company has agreed with KTM to develop a common 48 volt electric two-wheeler platform in the power range 3 to 10 kW for planned serial production in India. The serial production will start at Bajaj’s production site in Pune by 2022. The company will also venture into mid segment motorcycles (125-150cc).

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