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Expect BS-VI transition costs to hit demand; outlook for April-June quarter weak, says Bajaj Auto

Updated : March 02, 2020 06:40 PM IST

Combination of a weak economic backdrop combined with added costs due to transition to BS-VI from BS-IV makes the outlook for April-June quarter quite weak for domestic business, is the word coming in from Rakesh Sharma, ED, Bajaj Auto.

However, exports without Egypt have seen strong single digit growth in the commercial vehicle (CV) business, he said.

In terms of demand, he said they expect a decline of 10-15 percent between April to August due to BS-VI transition costs but are hopeful that festivities would reverse the down cycle. However, they do not think second half would be able to compensate for the double digit decline of the first half, said Sharma.

Below is the transcript of the interview

Q: The last time we spoke with you, you said that this whole April to June period could be very difficult period for the industry. Up until now, we have not seen any green shoots at all. How do you see the next 2 months shape up?

A: The underlying economic situation remains as it was before, which is a high single digit decline in the retail industry and on top of it there are issues of transition from BS-IV to BS-VI, which will add costs April onwards. So, the combination of a weak economic backdrop combined with added costs makes the outlook for April-June quarter quite weak for domestic business.

Q: Since you are globally exposed - are you beginning to see any resistance since global trade itself is shrinking?

A: Exports have had an outstanding run. We had the highest ever quarter in Q3, we had the highest ever sales in January and we have had strong growth of 15 percent in February. There is an Egypt issue, which is going to be finally brought to rest in April because last year it was in April when Egypt went down. March was the last export we did there. So, without Egypt there has been good strong single digit growth in the commercial vehicle (CV) business.

However, we are watchful about the impact of coronavirus. As yet there is no impact in our markets because of that. However, some disruption in Chinese supply chains of motorcycles will definitely be an area of opportunity for a company like us, who commands 35 percent market share in Africa. Therefore, I expect the export performance to continue January and February the way it has been doing in Q3.

Q: Your peers TVS Motor as well as Hero MotoCorp have put out a release saying that because of coronavirus supply disruption production could get hit by 10 percent due to auto component supply disruption. Won’t you face that pressure?

A: Our impact was less than 5 percent and we have taken steps of airlifting critical components although slightly expensive. Of course, our electric scooter had some sourcing from Wuhan itself, so that has got affected but other than that it’s a manageable situation for us. If the trajectory of supply chain improvement continues as it is occurring in China, then we actually don’t see a disruption of production in April-May also.

Q: How is the BS-IV and BS-VI evolving? Have you had to write-off anything?

A: Not at all. The BS-IV stocks are under control. In fact, for motorcycles, there is about 20 days of sale taking February as sale and in others like commercial vehicles they are 11-12 days of sales. This is an odd period where we are running down the BS-IV and not yet being able to fully ramp-up the BS-VI. That will start to occur in March.

Q: What would be the price increase on account of BS-VI and what is your outlook for FY21 in terms of volume growth?

A: The price increase is between Rs 6,000 and Rs 10,000 depending on the model. The 150cc plus model, where we have used fuel injection system can go up to Rs 10,000. So the cost increase is between 6 and 10 percent.

When there was BS-III to BS-IV transition, the economic backdrop was that of growth. The major difference this time is that the economic backdrop is not very supportive and on top of that when we are going to see these kind of price increases, then definitely it’s going to impact demand. We feel it will be 10-15 percent decline in April to August period and hopefully, when festivities kick in, they will serve as a trigger to reverse the down cycle.

However, I don’t think the second half will be able to compensate for the double-digit decline of the first half. We might just end up even-stevens or slightly negative for the industry in the whole year.

Expect BS-VI transition costs to hit demand; outlook for April-June quarter weak, says Bajaj Auto

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