Dear Shareholder,
I thought of starting with encouraging news about India''''s economic growth in 2016-17 (FY2017).
But as I started looking at the latest evidence, it didn''''t seem as encouraging as I believed it might be.
In its latest advance estimate, the Central Statistical Organization of the Government of India has pegged India''''s real GDP growth for FY2017 at 7.1%. No doubt it is better than all developed countries and most emerging markets including China. However, it is not as good as the 7.9% GDP growth achieved in FY2016.
So, we have grown; but not as much as last year. And we possibly have a longer way to go to attain a steady state annual growth rate between 7.5% and 8%, which is what we need to create a launch pad for greater employment, a more significant global economic presence and accelerated poverty reduction.
In my view three factors have played a role in dampening growth this year. The first is the lack of significant investments over the last four to five years. Of late, there has been a serious effort at government investments in some key infrastructure areas. But that takes time to translate into additional income and employment. And truth be told, there is hardly any private sector investment worth the name.
The second is also related to private sector investments but linked to the state of our banks, especially many of those under government ownership. The data for the quarter ended 31 December 2016 shows that for the 27 public sector banks which account for the vast majority of the nation''''s loans and advances, bad loans, called gross non-performing assets (NPAs), were estimated at RS, 647,759 crore, or 88% of the total recorded NPAs across all banks. This represents a 140% increase over what it was two years earlier, and constitutes 12% of total loans and advances. With these banks being badly stressed, there seems to be no appetite for advancing term loans without which it is virtually impossible to envisage the kind of investment spends needed for getting us securely on to a higher growth path.
The third is a shorter term aberration related to FY2017. I refer to the temporary negative effects of demonetizing H 500 and H 1,000 notes on 8 November 2016. Although the estimates for October-December 2016 show no appreciable dip in either real GDP or GVA, there seems to be enough evidence on the ground that removing over four-fifth of the value of currency in circulation almost overnight and substituting it with a much slower injection of the new H 500 and H 2,000 notes created constraints across various sectors of the economy. It remains to be seen what the overall effect of this will be on growth for the first half of FY2018. If at all, I hope it will be moderate.
In such a milieu, how has your Company fared? I would say this: Bajaj Auto could have possibly done better, but given the circumstances, it has done reasonably well to be where it is. Here are the key financials:
- Net sales de-grew by 3.5% to RS, 21,374 crore. Total operating income (net sales plus other operating income) decreased by 3.2% to RS, 22,026 crore.
- Operating earnings before interest, taxes, depreciation and amortization (EBITDA) reduced by 5.3% to RS, 4,778 crore.
- The operating EBITDA margin was 21.7% of net sales and other operating income. This continues to remain the highest in the industry.
- Operating profit reduced by 5.6% to RS, 4,470 crore.
- At 20.3%, the operating profit margin to net sales plus other operating income was also the highest in the industry.
- Profit before tax (PBT) de-grew by 3.8% to RS, 5,336 crore.
- Profit after tax (PAT) declined by 2.6% to RS, 3,828 crore.
- Surplus cash and cash equivalents as on 31 March 2017 was up by 36% to RS, 12,368 crore.
At a time of sluggish domestic growth and credit constraints coupled with political, economic and currency problems in many countries that are your Company''''s leading importers of motorcycles and three-wheelers, it requires considerable effort to fight against a strong negative under-current and stay profitable. That is what Bajaj Auto has done in FY2017.
Let me give you two examples. Consider the domestic market for motorcycles. Last year, despite an overall de-growth of 0.4% in the number of motorcycles sold in India, Bajaj Auto grew its sales by 7.2%. This year, while the industry as a whole grew its domestic sales by 3.7%, your Company''''s sales increased by 5.4% in terms of volume to over 2 million motorcycles. I need to emphasise that in FY2017, your Company''''s motorcycle sales grew faster than its major competitors.
Similarly, in a year when domestic three-wheeler sales for the industry as a whole dropped by 5%, Bajaj Auto ended FY2017 by selling 253,226 vehicles, just 0.7% below its all-time record sales of FY2016. Consequently, in the domestic three-wheeler segment (passenger as well as goods), your Company''''s market share increased from 47.4% last year to 49.5% in FY2017. In the domestic three-wheeler passenger vehicle industry, BAL expanded its market share by 2.2 percentage points, from 57.5% last year to 59.7% in FY2017.
Moreover, despite sluggish growth, Bajaj Auto''''s operating EBITDA was at 21.7%, which continues to be the highest in the industry.
To me, the more significant problem in FY2017 has been the external sector. In my letter to you last year, I had written that "due to external factors, especially poor economic conditions and severe foreign currency constraints in some of the key importing countries, we have not succeeded in equal measure on the export front — both in motorcycles and three-wheelers". Unfortunately, this has been true for FY2017 as well and, if I may say so, worse than in the previous year. Motorcycle exports de-grew by 16.5%; and three-wheeler exports fell by 31.2%. In terms of rupees, your Company''''s exports fell by over 19% to H 7,880 crore. In US dollars, it shrank by 23% to $1.09 billion.
Even so, Bajaj Auto is still India''''s largest exporter of both motorcycles and three-wheelers and it enjoys significant market shares. I hope that exports will pick up when some of these markets abroad get into better economic and financial shape. I am no soothsayer, and cannot forecast when.
Bajaj Auto is a sound and profitable company. What we need is a year''''s uptick to take us on to a new growth trajectory. May that be FY2018.
Let me share with you one more piece of information. Madhur Bajaj, who was the Executive Vice Chairman has, from 1 April 2017, demitted his executive role within the Company.
He continues as your Non-executive Vice Chairman. My sincere thanks to him for the role that he has played in Bajaj Auto.
Equally, my sincere thanks to our customers, dealers, vendors and employees who have always done their utmost for your Company. And to you for your continued support.
With best regards,
Rahul Bajaj ''''
Chairman
18 May 2017
Dear Shareholder,
The new national income estimates released by the Government of India''s
Central Statistical Organisation (CSO) have confused and perplexed
many. These numbers suggest that real Gross Value Added (GVA) grew by
7.5% in 2014-15 versus 6.6% in 2013-14. It seems that much of this
extra growth was on account of a larger basket of services.
I am neither an economist nor a statistician. However, as an
industrialist who has run a business for several decades and observed
others who manage different enterprises across many sectors, I find it
challenging to reconcile 7.5% growth in GVA with what one sees in
industry today. Over the last couple of years, there has been little or
no growth across many segments of industry and the annual financial
results of corporates for 2014-15 (FY2015) show this quite clearly.
There has been little or no uptick of either consumer or industrial
demand; and despite soft energy prices from the second half of FY2015,
companies have struggled with their revenues and profits. Some sectors
have suffered less; others more. But the sense on the street is that it
has been a difficult year ? quite removed from what one expects out
of 7.5% growth. I hope that the government under the premiership of
Shri Narendra Modi will usher in higher growth in FY2016. The country
needs it.
Given the difficult macroeconomic circumstances of FY2015, I feel
reasonably satisfied with your Company''s performance. While the details
are in the chapter on Management Discussion and Analysis, let me share
with you some key numbers:
- Despite a dull and sluggish market, Bajaj Auto''s net sales plus
other operating income grew by 7.2% to B 21,817 crore.
- Operating EBITDA rose by 1.7% to B 4,379 crore, which is the
highest in the Company''s history.
The operating EBITDA margin was at 20.1% of net sales and other
operating income, which continues to be the highest in the industry.
- Exports of two-and three-wheelers increased by 14% to 1.81 million
units. In terms of value, exports grew by 14.6% to more than US$ 1.5
billion.
- Profit before tax (PBT) reduced by 11.8% to B 4,085 crore. This was
largely due to higher depreciation arising out of the Companies Act,
2013; lower treasury income from your Company''s surplus funds; and a
one-time charge in the form of the National Calamity Contingent Duty
levied on Bajaj Auto''s Pantnagar plant. Consequently, Profit after tax
(PAT) decreased by 13.2% to B 2,814 crore.
- Surplus cash and cash equivalents as on 31 March 2015 was B 8,455
crore.
I must applaud the fact that in such a testing environment your Company
has grown sales while taking EBITDA to a record high and maintaining
best-in-class EBITDA margins.
Let me briefly share with you how I have seen Bajaj Auto''s business in
FY2015. In the domestic market, your Company has done better than
before in the entry level segment through its Platina and the new CT
100. It has also improved its performance in the upper end ''sports''
segment with various models of the Pulsar and its exciting KTM bikes.
It has dramatically improved its domestic sales of three-wheelers at a
rate that is significantly higher than of the industry as a whole. It
has also performed excellently on the export front ? increasing the
number of two-and three-wheelers sold by 14% to 1.81 million vehicles,
and revenues by 14.6% to exceed US$1.5 billion. These are all great
achievements.
However, there has been an overall fall in the volume of motorcycles.
This has been mainly on account of Discover, which occupies the middle
segment, between entry-level motorcycles on the one hand and the
premium segment sport or super-sport bikes on the other. Given the
weight of this segment in the overall domestic market, the fall in
sales of Discover has dragged down the otherwise excellent performance
of your Company in the two-wheeler front. Consequently, Bajaj Auto''s
motorcycles have lost domestic market share ? from 24.4% two years
ago to 20% last year, and then to 16.5% in FY2015.
Your Company''s Management led by Rajiv Bajaj and his team are
addressing this issue; and I hope to see a more vigorous performance in
this part of the business in FY2016 and thereafter.
But let me not peg expectations at too high a level. As of now, I have
not seen the kind of sustained demand pick-up that translates to a
healthy double-digit growth for motorcycles. I refer to the industry as
a whole, and not just to your Company. Given the possible prospects of
a poor monsoon in FY2016 and with interest rates still remaining high,
I am not sure about the strength of consumer durable demand in rural as
well as urban India. At a macroeconomic level, I see probably two more
quarters of relatively muted growth. Hopefully, I will be proved wrong.
But if not, one might witness a more sedate growth trajectory for cars
as well as motorcycles in FY2016.
I have written this earlier but bears repeating. As your Chairman, I
have huge faith and confidence in the capability of your Company''s
Management. If it could achieve 7.2% growth in operating income in a
challenging year ? and with it record EBITDA and a 20% EBITDA margin
? it can definitely produce higher sales and a greater market share
in better times. As I am sure it will.
Let me end with my thanks to our customers, dealers, vendors and
employees who have always done their utmost for your Company. And my
thanks to you for your support.
With best regards,
Rahul Bajaj
Chairman
21 May 2015
Dear Shareholder,
Last year, I shared with you my concerns about India''s gloomy economic
landscape in the course of 2012-13 and, looking forward to 2013-14, had
written, "I do not yet see signs of substantial recovery in the near
future. The decline in the growth may have bottomed out; but
incremental growth will be modest. I shall be pleasantly surprised if
India can grow its real GDP by over 6% in 2013-14."
Regrettably, desired growth has not occurred in the year under review.
In 2012-13, the country achieved real GDP growth of just 4.5%. In an
environment of widespread inactivity, risk aversion and non-governance
- where critical economic and infrastructure decisions were kept in
abeyance for one reason or the other - there was little chance of any
significant improvement in the investment cycle and, thus, the growth
rate. Hence, April-June 2013 saw real GDP growth of 4.4% compared with
the same quarter of the previous year; July-September 2013 was
marginally better at 4.8%, but wholly insufficient to boost the next
take-off; and October-December 2013 was 4.7%. The Central Statistical
Organisation''s forecasted growth for 2013-14 is 4.9%. Personally, I am
not so sure that even this growth is possible, for it assumes over 5.5%
growth in the fourth quarter of the fiscal year, i.e. for January-March
2014. However, even if it were to occur, the fact is that India''s GDP
will have grown by less than 5% for two consecutive years. Surely, we
deserve better.
Yet, there are rays of hope. In the recently held national elections,
the Bharatiya Janata Party (BJP) has alone won a majority of Lok Sabha
seats. Along with BJP''s partners, the National Democratic Alliance
(NDA) has secured in the lower house of Parliament a total of 336
seats. The new Prime Minister, Mr. Narendra Modi, has a clear bias in
favour of growth and economic development; and a proven record of doing
so over three consecutive terms as the chief minister of Gujarat. There
is a sense of optimism in the air and, like many in industry and in the
corporate world, I hope that the new national government of Mr. Modi
and his cabinet colleagues, will focus on removing all impediments to
growth and thus allow the corporate sector to regain its
entrepreneurial ''animal spirits'' that had all but disappeared in the
last few years under the Congress-led United Progressive Alliance
(UPA).
It will be a difficult task and much needs to be done, especially in
the first six months to a year of governance to demonstrate definitive
growth intent. I wish Mr. Modi and his team well but with a warning:
many believed that when the UPA-II government was formed in 2009 with a
stronger mandate and without the drag-down presence of the communist
parties, there would be a burst of much needed reforms. As we know,
these did not occur. The new NDA government must, therefore, ensure
that this is not another false dawn. India cannot afford that mistake
yet again.
It is time now to focus on your Company''s performance during 2013-14.
Let me first give the headline numbers and then share some of my
thoughts.
- It was a very difficult market. Consequently, net sales and other
operating income was flat at Rs. 20,348 crore.
- Sales in volume terms reduced by 8.7%, with Bajaj Auto selling 3.87
million units compared to 4.24 million units in the previous year. This
is a cause of concern and I shall dwell upon it in this letter.
- Exports rose by 2.4% - 1.58 million units in 2013-14 versus 1.55
million units last year. In terms of revenue, however, depreciation of
the Indian rupee helped in lifting exports by 22.1% to Rs. 8,199 crore.
- At Rs.4,305 crore in 2013-14, your Company''s operating EBITDA was 7.8%
higher than the previous year. The operating EBITDA margin was 21.2% of
net sales and other operating income, which was 1.6 percentage points
higher than in 2012-13. It is by far the highest margin in our
industry.
- Profit before tax (PBT) grew by 8.6% to Rs.4,632 crore.
- Profit after tax (PAT) was up by 6.6% at Rs. 3,243 crore.
This brings me to an observation regarding your Company''s performance.
At one level, one can but only applaud an organisation that responds to
a very challenging environment by delivering the Company''s highest
EBITDA; a significantly industry-leading EBITDA margin; and all time
high PBT and PAT.
At another level, however, we need to ask why should Bajaj Auto have a
flat growth in the top line? Or why should your Company, with its
outstanding offerings of motorcycles, lose 4 percentage points of
domestic market share - to 20% in 2013-14?
I have shared this thought with Mr. Rajiv Bajaj, your Company''s
Managing Director, who leads a performance driven team. As the CEO, he
will I am sure take a decision which is in the best long-term interests
of your Company.
On my part, I wish to look forward to rapidly growing domestic sales as
well as exports. Simply put, any time on the streets, I should see
Pulsars, Discovers, Platinas and KTM Dukes zipping by, let aside the
three-wheelers which, in any case, dominate the market. And, coming
from where I do, Bajaj scooters. That''s what I mean by Hamara Bajaj.
With the new national government at the helm, I also believe that we
will again see a period of economic optimism and growth. I envisage an
environment where we will return to consumer confidence who will make
the purchases that had been held back over the last few years. With
that, I look forward to a much needed rise in demand for motorcycles.
I have huge faith in the capability of Bajaj Auto''s Management. If it
could produce superior EBITDA margins in a challenging year, it is best
placed in the industry to deliver higher sales and a greater market
share when the headwinds disappear - as I expect they will under the
new national government.
Pen ultimately, I wish to congratulate Mr. Rajiv Bajaj for winning
NDTV''s Business Leader of the Year Award, 2013 as well as that of
CNN-IBN. His team and he have delivered performance through good and
bad years. These awards recognised the superior merits of the team that
he leads.
Finally, as always, my thanks to our employees, dealers, vendors and
customers who make us what we are. And to you for the support that you
show.
With warm regards,
Rahul Bajaj
Chairman
18 May 2014
