Informist, Thursday, Mar 31, 2022
By Satyanarayan Iyer
PUNE – Bajaj Auto Ltd’s fear of a hit to sales following the upcoming rollout of new safety norms is not without reason. There is history to back that. A look at the company’s sales numbers of the past few years along with the timeline of major policy changes for the sector proves this indeed has been the case.
Add to it, the spurt in input costs that is set to squeeze margins and make automakers scramble for price hikes.
At the entry level, the automobile sector is extremely price-sensitive. And vehicle prices tend to rise with each new feature, pinching buyers mainly in the entry-level segment.
The Corporate Average Fuel Economy norms are set to kick in from April while the one on mandatory onboard diagnostics is expected in the second half of 2022.
The fuel economy feature aims to lower vehicles’ fuel consumption by reducing their carbon dioxide emissions, while on-board diagnostics tell vehicle owners how efficient the systems are and if they are in need of attention.
In a recent interview with CNBC-TV18 channel, Bajaj Auto Managing Director Rajiv Bajaj said India had ushered in the new safety norms faster than anywhere else. Such moves have typically had a telling impact on sales of the company and the overall two-wheeler segment due to higher compliance costs, he said.
The switch to Bharat Stage-VI emission norms–a jump from Stage-IV–led to a 9% on-year fall in Bajaj Auto’s two-wheeler sales in 2020-21 (Apr-Mar). Of course, this switch was not the sole factor for the decline since the period saw massive disruption due to the COVID-19 pandemic and an unprecedented lockdown for nearly three months.
It was a double whammy for two-wheeler makers like Bajaj as it was compelled to raise prices even during the pandemic, when economic activity had come to a near halt. In the entry-level motorcycle segment, which the company classifies as the most “cost and fuel conscious” one, the upgrade to BS-VI led to a price hike of about 5% on a 40,000-rupees motorcycle.
On an average, Bajaj Auto had increased motorcycle prices by 2,000-5,000 rupees.
One year earlier, in April 2019, the anti-lock braking system norms for better braking in vehicles of higher than 125cc kicked in. This upgrade that helps prevent skidding led to an around 3,000-rupee increase in motorcycles with anti-lock braking system, and the company posted a 5% fall in 2019-20 sales.
Further back, in April 2017, the industry switched to BS-IV norms from BS-III, and Bajaj faced the same predicament.
In 2017-18, the automaker’s two-wheeler sales remained nearly unchanged, compared with the previous two years. What is noteworthy is that this status quo came on a low base since the switch to BS-IV was preceded by demonetisation in November 2016. And then came the rollout of the goods and services tax regime in July 2017 – another disruptor event that had a scathing impact on demand and sales.
In 2016-17, the year of demonetisation, the company’s sales were down 6% at 3.2 mln units.
COST PRESSURES
Cost pressures have been hurting due to shortage of key inputs and a surge in global commodity prices.
Bajaj Auto, like many other companies, faces a steep rise in raw material costs. Input costs have risen to 67% of revenue in 2021-22 from 57% in 2016-17.
To top it, shortage of inputs, such as semiconductor chips, has hit the production of premium motorcycles.
Elevated cost pressures are set to translate into vehicle price hikes even in a price-sensitive sector like two-wheelers. In line with the broad industry, Bajaj Auto is set to hike motorcycle prices to the tune of up to 3,000 rupees in April due to a rise in input cost.
In 2021-22, the Pune-based company aims to make 4.3 mln vehicles, including commercial vehicles. In the 11 months ended February, the company has despatched 3.6 mln units of two-wheelers and 4 mln units in all.
Bajaj Auto, India’s second-largest motorcycle maker by volumes after Hero MotoCorp, has been struggling to meet its annual operating margin guidance of 20%, which it briefly achieved in 2020-21. It hopes to end the current financial year with an operating margin of 16-17%.
This comes even as the company’s overall raw material cost, as a share of sales, has been partly offset by the shift to cheaper alternatives such use of more fibre and plastic in lieu of costly steel.
Raw material costs have remained at 65-67% of revenue in the past four years.
Bajaj’s story only reflects the dilemma faced by the broader sector. While the industry has exhorted the government to slow down on its proposed changes to safety norms, the latter has only looked to further accelerate policies to ensure safety.
Of the 150,000 recorded casualties on Indian roads in 2019, 37% were killed on two-wheelers with over-speeding accounting for over 60% of these deaths.
The following table shows the impact of the change in norms and raw material prices on Bajaj Auto’s two-wheeler sales:
*Estimated by the company
End
Edited by Shirsha Thakur
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