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MEIS scheme capping may impact Bajaj Auto's export competitiveness

Bajaj Auto has been hit hard by the capping of MEIS (Merchandise Exports from India Scheme) in early September. The development has not only thinned the company's overall margins but is also impacting its competitiveness against Japanese and Chinese players in overseas markets.

Concerned over the development, the company has taken up the matter with the government through the Society of Indian Automobile Manufacturers (SIAM), to resolve the issue at the earliest.

The Director General of Foreign Trade (DGFT) vide its notification dated September 1, 2020 restricted MEIS benefit on exports, to a maximum of Rs 2 crore for the September-December period. Exporters, on the other hand, want the government to extend the MEIS till March next year. One of the fundamental aspects of the order has been that exports which are to be made during the period between September-December are based on orders which have already been negotiated much earlier, factoring MEIS benefits. Any sudden change will, therefore, impact exporters financially as buyers are unlikely going to revise their prices upward, the exporters claim.

Commenting on the development Soumen Ray, CFO, Bajaj Auto said, “The impact of the same, including reversal of MEIS for Q1FY2021 is Rs 78 crore – else, the EBITDA percentage would have been 19 percent”. EBITDA, which in business parlance stands for earnings before interest, taxes, depreciation and amortisation, is a measurement for the company’s operating profit as a percentage of its revenue.

MEIS was introduced in 2015 to offset infrastructural inefficiencies and associated costs involved in export of products, which are manufactured in India, especially those having high export intensity, employment potential and thereby enhancing India’s export competitiveness. Under MEIS, the government provides duty benefits depending on product and country. However, being non-compliant with World Trade Organisation (WTO) norms, there has been pressure to replace it with a suitable one in the form of Remission of Duties or Taxes on Export Product (RoDTEP) which will have elements of input tax credit.

Speaking to investors, Rakesh Sharma, executive director, Bajaj Auto said, “It is a very significant thing for our level of exports”. To be sure, Bajaj Auto has been outperforming industry in recent years in its exports market. In FY2020, exports contributed nearly 47% to volumes, the records suggest.

According to Sharma, since there was no clarity, the company had to take a hit in Q1 and Q2, FY2021 as abundant caution due to the retrospective effect of the policy. “It is still not clear,” Sharma added, emphasising that this prompted the company to increase the price in order to pass on the impact of MEIS withdrawal. “We had to be laser-sharp as our understanding of competition and opportunity in the overseas market given that China and these are not just Chinese but also Japanese brands manufactured out of China which we are competing with. There is intense competition everywhere” he added.

Pulsar packs a punch
With a sharp eye on improving margins, Bajaj Auto has been focusing on expanding its footprint in the 125cc segment. In Q2 FY2021 (July-September 2020), the company recorded its highest Pulsar sales in domestic and overseas markets put together during Q2, despite the apprehensions amongst its leadership over the current environment. The Pulsar franchise has substantially expanded by Pulsar 125 which captured 16 percent market share in the 125cc segment despite being the most expensive. To the management’s delight, the expansion of Pulsar 125 has not eaten into the share of the standard Pulsar.

In fact, Bajaj Auto management is of the opinion that this has helped in expanding the overall 125cc category itself as the segment now stands at 25 percent. During FY2020, the segment had an exposure of around 20 percent. The company is now looking to increase its market share further with backing from advertisement campaigns. Similarly, the company is also looking to introduce a drum brake version.

However, despite the overall ballooning of Pulsar franchise, Bajaj Auto did see some dip in volumes of the Pulsar 150 and NS range though largely due to supply chain issues which are now being corrected. The company is planning to bring some refreshed models and increase its marketing spending to push the brands further.

Demand stable as festive season starts, cautiously optimistic
The company management claims that the current two-wheeler demand during the past few days suggests that it is almost 90 percent of the similar period last year. To take advantage of any rise in demand, Bajaj Auto has increased the current inventory levels to around 45-48 days which is normal during festive season. However, the next few days are going to be important and are keenly watched by the industry. Fortunately, so far pricing sanity has persisted across the industry. However, in case festive demand does not live up to the expectations, then OEMs including Bajaj Auto will have no choice but to offer deep discounts to clear the inventory.

Rs 1,138 crore PAT in Q2 FY2021, down 19%

For Q2 FY2021, Bajaj Auto reported revenue of Rs 7,442 crore, down 8 percent YoY, EBITDA at Rs 1,300 crore compared to Rs 1,305 crore for the same period last year.

The company sold a total of 1,053,337 two- and three-wheelers globally, which is 10 percent lower compared to the same period last year. The total sales includes 550,194 two-wheelers (+6%), 23,392 CVs (-78%) in the domestic market, and 414,271 two-wheelers (-11%) and 65,480 CVs (-20%).

During the quarter the company said it witnessed the highest ever sales of the Pulsar motorcycle at 348,561 units; KTM and Husqvarna witnessed the highest ever domestic sales at 20,200 units.

For the quarter the company reported PAT of Rs 1,138 crore, which is 19 percent lower YoY. Bajaj Auto says the PAT for Q2 FY2021 was lower due to the lower interest rates/yields on the back of a reduction of treasury income. Also, last year, the corporate tax rates were revised which resulted in a one-time gain of around Rs 182 crore for Q2 FY2020.

Bajaj Auto says the domestic two-wheelers registered a strong turnaround in the first half of the quarter driven by pent up demand. While the exact festive spike is awaited, early signs show (strong) indications of a recovery. The OEM says its growth was in line with the Industry at 7 percent in Q2 FY2021, and its market share remained at the same level of 18.2% in H1 FY2021 vs 18.1% in H1 FY2020.

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