FE Editorial : Wheels come off

Written by The Financial Express | Updated: May 18 2012, 06:41am hrs
Bajaj Autos results disappoint, so did HeroMoto

January-March earnings for Bajaj Auto, Indias second-largest two-wheeler company in terms of volumes, confirm that the good times for the auto companiesboth two-wheelers and passenger carsare over. Given how even rural demand is splutteringsee Bharat bandh on Reflect pagethe results are not surprising. Bajajs net profits were down 45% at R772 crore and though Hero MotoCorp declared a 20% rise in net profits at R603 crore, this was also below expectations.

Two-wheeler sales are not driven much by bank finance and therefore macroeconomic conditions play a big role in boosting them. Sales during the first nine months of the fiscal 2012 were robust but started flagging during the fourth quarter period as the macroeconomic indicators started worsening. With the low-to-medium salaried classes as the main buyers for two-wheeler products and dim prospects of salary hikes, sales are expected to be subdued in the coming quarters. This apart, rising input costs and competitive pressures remain a problem for both Bajaj and Hero. While Bajaj has not raised prices for its products so far, Hero has raised prices by R500-1,000. Both companies are facing intense competition from the Japanese two-wheeler firm Honda Motorcycles and Scooters India. The company had beaten Bajaj in terms of volume sales in March and poses a big threat to Hero on the back of its better R&D capabilities.

Bajaj has another problem: it has exited the scooter segment which is now beginning to show growth. Both its competitors are present in the segment and can derive advantage from any change in consumer demand. Bajaj Autos managing director Rajiv Bajaj may shrug off such apprehensions by pointing out that Bajaj remains the most profitable company and boosting bottom lines is more crucial than pushing volumes, but the gap is reducing. With its competitors focusing on the mass segment and Bajaj consciously keeping away, this could be an additional problem.