Management Discussion and Analysis

“Presence is Nothing without Performance”

The advance estimate of real GDP growth released in February 2016 by the Central Statistical Organisation of the Government of India suggests a pick-up from 7.2% in the brvious year to 7.6% for 2015-16 (henceforth FY2016). While still short of the 8% growth that India needs to achieve, on a steady state basis, this will be a creditable achievement given the muted global economic scenario. Indeed, there have been early signs of an up-tick in both consumer demand and the beginnings of much needed growth in investments. As of now, these are more in the nature of ‘green shoots’. However, if the monsoons are as good as the brliminary meteorological forecast suggests — coming as it will after two consecutive years of drought across many parts of India — then the country ought to expect higher GDP growth in 2016-17.

How was FY2016 for India’s two- and three-wheeler industry? Despite somewhat higher estimated GDP growth for the year, domestic sales of motorcycles (in units) showed a marginal degrowth of 0.4% compared to the brvious year. Given the difficult global scenario, exports of motorcycles for the industry as a whole reduced by 1.9%. Consequently, total motorcycle sales in India plus exports in FY2016 fell by 0.7% over FY2015. After a smart growth of three-wheelers sales (domestic plus exports) in FY2015, the numbers for the industry remained almost flat in FY2016 — with a modest growth in domestic sales being netted out by an almost similar degrowth in exports. To summarise, for the Indian industry, motorcycles and three-wheelers sales both in the country and abroad degrew by 0.6% in FY2016 vis-à-vis the brvious year.

How did Bajaj Auto Ltd. (‘Bajaj Auto’ or ‘BAL’) perform in what was a difficult year for the industry? In two words: very well. To apbrciate this, it is useful to start with the financials.

Bajaj Auto’s Financial Performance for FY2016

l Net sales grew by 5.4% to Rs. 22,253 crore. Total operating income (net sales plus other operating income) increased by 5.3% to Rs.  22,967 crore.

l Operating earnings before interest, tax, debrciation and amortisation (EBITDA) increased by 17.5% to Rs. 5,147 crore, making it the highest in the Company’s history.

l The operating EBITDA margin was 22.4% of net sales and other operating income, which remains the highest in the industry.

l Operating profit grew by 17.9% to a record Rs.  4,839 crore.

l At 21.1%, the operating profit margin to net sales plus other operating income was also the highest in the industry.

l Profit before tax (PBT) increased by 31.8% to a record Rs.  5,385 crore.

l Profit after tax (PAT) rose by 29.8% to Rs.  3,652 crore, another record for the Company.

l Notwithstanding two dividend payouts in FY2016 totalling to Rs.  3,465 crore, surplus cash and cash equivalents as on 31 March 2016 was up by 7.5% to Rs.  9,089 crore.

Motorcycles

In recent years, Bajaj Auto’s story on motorcycles is based on key strategic perceptions backed up by rigorous implementation of such insights. To understand this in some detail, one needs to start with the picture of overall industry sales of two-wheelers, which is given in Chart C.

As is evident from the chart, there has been hardly any growth in motorcycle sales for the last three years. In fact, there has been a marginal degrowth in FY2016. In such a milieu, the challenge to creatively differentiate becomes greater than ever before. Indeed, it becomes the single most important factor that separates a market or segment leader from others.

In FY2016, Bajaj Auto sold almost 3.36 million motorcycles in India and abroad. It sold nearly 1.9 million motorcycles in India, which was 7.2% higher than in the brvious year, driven by:

a) The Pulsar and the Avenger in the sports or performance segment. For the year, Bajaj Auto sold 729,304 such bikes and reinforced its dominant leadership position in this segment, improving its market share from 41% in Q4/FY2015 to 49% in Q4/FY2016.

b) The CT and the Platina in the entry or utility segment. Here, by a combination of pricing and aggressive marketing of the CT 100 and by creating a niche value proposition for the Platina, the Company succeeded in selling 865,366 bikes in FY2016 and ended the year with a healthy market share of 35%. In fact, the entire growth in this segment was monopolised by BAL.

c) The KTM and the Pulsar RS 200 in the niche super-sports segment. The KTM, India’s fastest growing sports motorcycle brand, increased its sales by 32% between FY2015 and FY2016. And the new Pulsar RS 200 (RS for Race Sports), introduced in March 2015, has done imbrssively with sales of over 2,900 per month. There are nearly 35,000 customers who have bought the RS 200. Our share in this super-sports segment of the market has increased from 35% in FY2015 to nearly 60% in FY2016.

Through our creatively differentiated offerings, we have, therefore, captured major market shares in three segments: the super-sports, the sports and the entry-level. In February 2016, Bajaj Auto launched the V15, a 150 cc model to create a new, differentiated and more powerful engine category within the mass commuter segment that is brsently dominated by 100 cc and 125 cc motorcycles. Though early days yet, the Company is confident that the V15, whose fuel tank assembly contains metal from India’s flagship aircraft carrier, the INS Vikrant, will occupy a white space where the traditional commuter segment ends (100 cc to 125 cc) and the sports/performace segment begins (150 cc and above). In doing so, BAL expects to attract more customers to this newly differentiated segment, create and grow a brmium offering and thus increase our market brsence in the commuter category.

Commercial Vehicles: Three-Wheelers

Bajaj Auto ended the FY2016 with a record domestic sale of 254,995 vehicles, up by 8.8% over the brvious year as against an industry growth of 1%. In the domestic three-wheeler passenger vehicle industry, BAL expanded its market share by 3.3%, from 54.2% in FY2015 to 57.5% in FY2016. Total three-wheeler sales of the Company, which includes domestic and exports, was its highest ever, at 534,995 units in FY2016 — a growth of 3.1% over the brceding year. In the aggregate, i.e. domestic sales plus exports, Bajaj Auto accounted for 56.8% of sales — with its relative leadership position having risen from 55.2% in FY2015.

New three-wheeler permits were released during the year in Maharashtra, Delhi, Chandigarh, Hyderabad, Jaipur, and Kota, which played their roles in growing the Company’s sales. The Company has maintained a strong performance in the petrol and alternate fuel markets, where it enjoys a dominant market share of 90%. It also maintained its dominance in the small diesel market with a market share of 65%. Moreover, even in the large diesel category, a segment where it has a relatively lesser brsence, Bajaj Auto’s market share went up from 18% in FY2015 to 20% in FY2016.

Bajaj Auto’s growth performance has been better than the industry in all categories - in petrol and alternate fuel vehicles, in small diesel vehicles as well as in large diesel vehicles.

In exports, however, the Company registered a drop in sales of 1.7% over the brvious year. Part of this is on account of the imbrssive export growth of 9.2% in FY2015, which ubstantially raised the base. The drop in FY2016 was due to external factors — such as economic and political crises as well as financial and foreign currency constraints in some countries like Egypt and Nigeria, which are key markets where we sell our three-wheelers.

International Business

Relatively speaking, though Bajaj Auto’s international business was somewhat muted in FY2016 for reasons stated immediately above, it continues to be by far India’s largest exporter of motorcycles and three-wheelers. It exports to 78 countries and enjoys the No.1 or No.2 position in more than 20 of them. During FY2016, exports accounted for 43.9% of the Company’s net sales.

As mentioned in the brvious section, economic, fiscal, financial and political problems besetting some key countries in Africa like Nigeria and Egypt, as well as sharp debrciation of currencies across some nations in Latin America and Africa, affected exports of both motorcycles and three-wheelers. In numbers, motorcycle exports degrew by 4.1%; while three-wheelers exports fell by 1.6%. In US dollars, revenue from exports fell by 6.9% to USD 1.42 billion in FY2016.

Despite this downturn, it is necessary to mention two noteworthy features of the key export markets. The first is the growth of Pulsar exports, which has increased from around 226,000 units in FY2014 to 250,000 in FY2015 and then quite sharply to 313,000 units in FY2016. It goes to show that the Company’s offerings in the brmium sports category are increasingly attracting consumers abroad and getting definite traction. The second is that Bajaj Auto still enjoys significant market shares, and has in fact improved, in important geographies: 24% in markets where it operates in Latin America, driven by the Pulsar 200NS; and 33% share in the relevant markets of Africa where the Boxer continues to lead our motorcycle sales

Awards

FY2016 saw Bajaj Auto winning several awards for its motorcycles, most of which were on account of the Pulsar RS 200 and the AS 200. The Pulsar RS 200 has alone won a record 15 awards in the course of the year. Table 4 gives a list of these awards.

R&D: New Products

Bajaj Auto’s R&D has been on a ‘super-active’ mode to help the Company launch one product after another in FY2016. These have helped us to grow strongly despite a subdued market situation. The key highlights are given below.

V15

Each fuel tank assembly made contains steel from India’s legendary aircraft carrier, the INS Vikrant. V15, the new brmium commuter from Bajaj Auto, not only pays homage to our heritage and history, but also has defined an invincible form by its looks, proportions and an understated tough design. The completely ‘neo-retro’ styling with an imposing front fascia and a pumped up fuel tank takes this vehicle to a totally new dimension.

The V15 comes with an all new 150 cc, air cooled single-cylinder DTS-i engine which offers a maximum output of 12 PS (metric horsepower) at 7,500 rpm and a peak torque of 1.34 kg per metre at 5,500 rpm. With its five-speed gear box, the power train offers ample reserve of torque at all rpms for different riding terrain. The throaty exhaust sound differentiates the V15 from others and gives it a unique character. A double cradle frame combined with a 33 mm diameter fork give an edge to the handling of the V15. Lower seat height and wider handle bars provide a commanding ergonomic position to the rider. Bigger and wider tyres add to performance and safety.

CT 100B

CT 100B is the new variant of CT 100. This entry level commuter bike retains the engine of the CT 100, which produces 8 PS power while meeting customer expectations on fuel efficiency and costs. It has a strong visual appeal with a flat, longer and comfortable seat and a round head lamp. The fuel efficiency of the CT 100B is at a high of over 99 km per litre thanks to improvements made in the ignition system. The bike has a conventional telescopic suspension in the front and a spring-in-spring (SNS) suspension for the rear.

Boxer BM150X

This is intended for export to African countries and is a variant of Boxer BM150. It employs a four stroke, single cylinder, air cooled 144.8 cc engine which generates 12 PS power at 7,500 rpm and 1.25 kg per metre at 5,000 rpm. It has a four-speed transmission. The Boxer BM150X is strong and rugged due to a semi-double cradle frame. It has alloy wheels, front suspension bellows, rear SNS suspension, round head lamp and has some features for improved on- and off-road riding, such as: (i) Special raised front fender with a two-tier design which effectively brvents mud from being trapped while providing better splash protection to the rider; (ii) High ground clearance of 190 mm; and (iii) Specially designed semi knobby (block pattern) tyres, for perfect handling during off-road usage.

Avenger 220 Cruise

In October 2015, the Avenger brand was revamped with introduction of Avenger Triplets. The Avenger 220 Cruise has traditional chrome looks. Elements like the foot pegs, the handle holder logo, the badge on the grab and seats were updated to rebrsent a modern Cruiser. Speedometer was improved with better graphics and a new LCD inlay. Also, a new suspension gives a better ride. These subtle feature enhancements went a long way in uplifting the brand value of the model.

Avenger 220 Street

The second of the Avenger triplets was the 220 Street. With a black dusky look this bike is an exciting value proposition for the customer. A combination of excellent ergonomics for street usage has improved urban manoeuverability. Its alloy wheels aid better handling and control. Other improvements of the Avenger 220 Cruise are also available in the Street version.

Avenger 150 Street

The Street has been made in two engine capacities to give more choice to the customer. The 150 cc, two-valve engine is tuned and matched to the vehicle. Wider tyres offer the bike excellent stability and agility when required. This version has been made compatible to meet Euro 3 norms and was exported to Europe.

Pulsar AS 150

After the successful domestic launch of Pulsar AS 200 in March 2015, a smaller sibling entered within a month. With these AS models, a larger cross section of younger Indians have now got a flavour of adventure sport biking. The lighter and more fuel efficient version of AS 150 is more affordable as well. It has a four-valve high power engine with a counter balancer and optimised engine mounting arrangement. It also has other enhanced features like mono-shock absorbers and a wider rear tyre compared to that of the existing Pulsar 150.

Maxima-Cargo (Diesel and CNG)

BAL already has a commanding market share in the three-wheeler passenger segment. To add to this, we have added the Maxima Cargo model in the cargo segment. The Maxima Cargo has a long wheel base, full steel cabin with doors and has been launched with two fuel options: diesel and CNG. The vehicle is offered in two configurations, namely fully built with cabin and load body, and a drive-away-chassis with the cabin. The product shares many of the features of the Maxima passenger vehicle.

Power Clutch (Compact, Compact+ and Maxima)

R&D has provided a highly ergonomic hand clutch on all the diesel variants. The clutch uses an innovative design which gives low hand force while giving over 40,000 km of clutch life. This has helped Bajaj Auto to gain substantial market penetration in the diesel segment .

Operations, Productivity and Quality

A consistent theme across all Bajaj Auto’s manufacturing plants (Waluj, Chakan and Pantnagar) has been the continuous improvements in performance through lean manufacturing, higher quality, cost reduction, tight and lean supply chains, greater throughput and the introduction of new products and processes. This journey is termed as Company-wide TPM Implementation, and has enabled the Company to reduce unit costs, optimise plant capacities, efficiently introduce new products, and bring about profit enhancing flexibilities in the manufacturing line.

This shows up in the data, some of which is plotted in Chart F below. For instance, over the last eight years:

l The number of motorcycles produced per person per year has increased from 507 to 804 — a productivity growth of 58.5%.

l The number of three-wheelers produced per person per annum has risen from 245 to 452 — rebrsenting a growth of 84.5%.

l And the value of fixed assets utilised per vehicle produced has reduced from H 2,833 to H 1,810 — a reduction of 36.1%.

These improvements have helped to avoid needless investments. As an example, the productivity improvements in FY2016 alone saved investments worth over Rs. 40 crore.

These are not all. Turnover per employee has risen by 17.3% between FY2013 and FY2016. And the asset turnover ratio has improved by 11% over the same period.

Quality improvements go hand-in-hand with productivity, which have been carried out through a Company-wide implementation of the TPM philosophy. To give another example, thanks to continuous TPM work and consequential productivity improvements across our plants, Bajaj Auto’s warranty cost per vehicle has steadily reduced from Rs.  26 in FY2012 to H 18.70 in FY2016

— a remarkable drop of 28% over a period of four years.

The Japan Institute of Plant Maintenance (JIPM) has awarded the Chakan and Waluj plants with its ‘Special Award for TPM Achievement’; and the Pantnagar plant with the ‘Consistent TPM Commitment Award’. Even more rewarding are the comments from Professor Toyoshiro Inamura, JIPM Assessor and Professor Emeritus at the Nagoya Institute of Technology. During the TPM award ceremony he said: “Your ‘Vendor Improvement’ is better than the case in Japan and will be the best in the world… Your ‘TPM University’ is also unique and has the possibility to be a research institute from which new TPM technology is developed.”

As a part of sustainable development initiatives, plants have implemented various breakthrough ideas that have, for instance, saved 5.9% and 15.5% in electricity and fuel consumption, respectively. The Waluj plant is situated in Marathawada, an area plagued by water scarcity. In response to this, we have worked on water conservation and achieved an annual physical saving of almost 17%. Both Waluj and Chakan plants have sustained their water-positive status.

In FY2016, Waluj, which is the export hub of Bajaj Auto, produced 1.65 million motorcycles of which 1.19 million were exported; and 527,000 three-wheelers, of which 280,000 were shipped abroad. Chakan, which concentrates on manufacturing high-end bikes, produced over 870,000 motorcycles. And Pantnagar manufactured nearly 820,000 motorbikes.

Subsidiary

Bajaj Auto International Holdings BV (BAIH BV)

Bajaj Auto International Holdings BV is a 100% Netherlands based subsidiary of Bajaj Auto Ltd. Over the years, through this subsidiary, Bajaj Auto has invested a total of Rs. 198.1 million (H 1,219 crore), and holds approximately 48% stake in KTM AG of Austria (KTM), the fastest growing motorcycle brand in the world.

Calendar year 2015 has been a record year for KTM, with highest sales in units and highest turnover in the history of the Company. It sold 183,170 motorcycles, a growth of 15% and achieved a turnover of Rs.  1.02 billion — crossing the billion euro mark and recording a growth of 18%. Profit after tax was at Rs. 63.9 million (H 461crore), a growth of 12%. The proportionate profit to Bajaj Auto Ltd. is Rs. 30.65 million (H 221crore), which has been accounted for in the consolidated results.

In its Annual General Meeting for the calendar year 2015, held on 21 April 2016, KTM AG declared a dividend of Rs.  2.00 per share, compared to Rs. 1.50 per share for the year 2014. BAIH BV is entitled to receive Rs.  10.41 million (Rs.  78 crore) as its share of dividend.

During the year, Bajaj Auto manufactured 69,532 units of KTM Duke at its Chakan plant. 30,362 units were sold through the Pro-Biking network in India and 38,926 were exported to KTM/KTM distributors.

KTM is listed in the Third Regulated Market of the Vienna Stock Exchange and its market capitalisation as on 31 March 2016 was Rs. 1,329 million (H 10,020 crore). In the recent AGM, it was proposed to delist KTM from the stock exchange.

In March 2016, Bajaj Auto and KTM entered into an agreement vide which Bajaj Auto will establish the KTM brand in Indonesia, the largest motorcycle market in South-East Asia.

50 Years… And Counting

A Company’s annual Management Discussion and Analysis is a formal document, not a celebratory piece. At Bajaj Auto, however, there is a very important reason for celebration. FY2016 saw Rahul Bajaj complete 50 years with the Company. He has been a guiding force all through, as a hands on manager, as the Chairman and Managing Director, and in more recent times, as Chairman. It is not an exaggeration to say that he has played a huge role in making Bajaj Auto a household name in India.

Nothing escaped his attention then. And quite frankly, nothing does now. On behalf of the Management of Bajaj Auto, we thank him for five decades of leadership and wish him many more years at the helm.

Cautionary Statement

Statements in this Management Discussion and Analysis describing the Company’s objectives, projections, estimates and expectations may be ‘forward looking’ within the meaning of applicable laws and regulations. Actual results may differ from those exbrssed or implied.