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 ''''
18 May 2017