The markets seem to have got early wind of Bajaj Auto's disappointing first quarter performance. How else does one explain the stock's southward spiral from Rs 573 to Rs 517 in just five trading sessions. More so, since the decline has come during a period when the Sensex has been buoyant, having touched a new high on Thursday. The two-wheeler major has sold nearly 2.97 lakh units, which marks an 11.82 per cent drop in volumes. However, rupee sales have dipped merely by 1.31 per cent to Rs 800.30 crore, thanks largely to higher realisations from new product launches.

Yet, dwindling profitability on sales could be an area for concern. At the operating level, margins have actually dipped from 16.49 per cent to 14.79 per cent. Company sources attribute this to increased material costs and a dip in the sales of the high profit earning three-wheelers. Furthermore, the new wage agreement and increased advertising for new product launches have also played an integral role in eroding BajajAuto's margins. Net profit has dipped by 7.76 per cent to Rs 111.09 crore despite the company's debt-free status. There's only an interest-free loan from SICOM and the company has paid out just Rs 51 lakh as interest. The quality of earnings in the first quarter is also reflected in the fact that other income as a percentage of profit before tax stands at 47.6 per cent. But it would be prudent to mention here that the company's huge other income component of Rs 75.72 crore is in essence recurring revenue from its treasury operations.

Market leaders are often slow to respond to competition and so has been the case with Bajaj Auto. But the company seems to have got its act together and is now ready to claw back its lost market share with a host of new product launches. It is slated to invest nearly Rs 850 crore in the next few years for new product launches and capacity expansions. Of this, Rs 350 crore will fund the design and development of new models and Rs 500 crore will be invested in the expansion ofits manufacturing plant located at Aurangabad. Through this investment, Bajaj hopes to roll out 10 new models within the next three years. Special emphasis would be on the Indo-Japanese motorcycle segment.

Bajaj Auto has largely been dubbed as a production company but it has lately demonstrated that it has turned market-savvy. Amidst growing environmental concerns, the company recently launched the Legend, the first-ever four-stroke scooter which meets the year 2000 emission norms. The company's strategy now seems intent on having a product to suit every need - the Classic SL, Chetak and Super will cover the range in scooters. While in motorcycles, Bajaj will be represented in almost every segment starting from the low end M-80 to the stylish and high-powered segment with the 110cc Mercury and the upmarket 175cc Eliminator. Also with the third plant planned at Chakan near Pune, Bajaj's total production of two- and three-wheelers, could well touch the prestigious 2 million vehicle mark. A corollary of whichwould be the enormous pricing cushion that the company would enjoy, due to the truly world scale of operations and the resultant lower costs. It is difficult to write-off the leader and the markets will soon realise this.

Telco

A demand reversal in commercial vehicles, which is a far cry from the wretched business conditions that plagued the segment last year, has helped Telco stem its first quarter loss. Reflecting which is the fact, that Telco has managed an 8.17 per cent improvement in the sales of commercial and utility vehicles which stood at 25,229 units. This is in stark contrast to last year when total unit sales at Telco had actually dipped 40.7 per cent to 23,601 units. Additionally, a 24 per cent increase in exports to 2,245 units has further helped Telco. However, even this performance has not helped the automotive major come back into the black. In fact, the net loss was contained to Rs 33.53 crore in the first quarter, compared to Rs 35.63 crore last year.

But in line with theimproved vehicular offtakes, Telco has managed to post a strong operational performance in the first quarter. Net sales during the quarter jumped 24.63 per cent to Rs 1,592.08 crore, aided to some extent by a 40.75 per cent improvement in export revenues. However, teething trouble with the integration of the car manufacturing facility and consequent delivery problems of the Indica, have belied Telco's hopes of returning to its profitable ways in the first quarter. In fact, analysts state that the Indica, has eaten into earnings from improved volumes in the commercial vehicle segment and higher margins in the utility vehicle segment and HCVs. A direct consequence of which is the fact that Telco unable to restrict expenses which have increased disproportionately by 25.26 per cent to Rs 1,470.52 crore.

All of which have resulted in the operating margins at Telco taking a beating. The operating margins dipped from 8.10 per cent to 7.64 per cent. The dip would have been even higher had it not been for thecompany's improved product mix which tilts more towards the higher margin utility vehicles namely - Sumo and Safari. Furthermore, higher depreciation and interest charges have further eroded the earnings growth at Telco, which has resulted in the net loss of Rs 33.53 crore.

However, with a turnaround in the commercial vehicular segment looking a distincy possibility now, due to an overall economic revival - Telco appears to be on a firm wicket. More importantly, the full integration of the car manufacturing facility would also result in a substantial increase in production volumes of the Indica, which would then help revitalise Telco's bottomline. However, given that the Indica is only likely to achieve a breakeven at around 60,000 units, Telco might have little option but to absorb losses on the small car at least in the interim. All of which clearly reflect the fact that the negatives for Telco in the short term, outweigh the positives. Thus could it be that Telco once again resorts to a one-time profiton sale of its ancillary units to cushion the earnings growth?

With contributions from Percy Dubash