Bajaj Auto Limited (BAJAJAUTO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Bajaj Auto Limited Q2 FY '21 Results Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Raghunandhan, Research Analyst of Emkay Global. Thank you, and over to you, sir.

Good afternoon, everyone. We thank the management for taking out time for the call. We have with us Mr. Rakesh Sharma, the Executive Director; Mr. Soumen Ray, Chief Financial Officer; Mr. Sanjeev Garg, Divisional Manager, Treasury, IR and FP&A; and Mr. Anand Newar, Divisional Manager, Investor Relations. We request the management for opening remarks, and then we can open the floor for questions. Over to you, sir.

Good evening, everyone. This is Rakesh Sharma. I hope everyone is safe and not getting worn out by COVID. We've, as you noticed, slightly changed the format of this engagement. So we'll commence with a brief opening remark from my side, which will emphasize on our take on the quarter, which has gone by. And in the process of doing that, we'll probably address some of your questions. We will then, as usual, open the floor for questions, and Soumen and I will take these questions. So just a few quick points from my side to set the stage. So when we evaluated -- when we evaluate our quarter 2 performance, within the company, then we do it in the context of the objectives we had set for ourselves before Q2 and as we were emerging out of the severe lockdown phase of April and May. So business has started to recover already in June, as you very well know. Though future visibility still remain poor. So at that time, the first thing we had done was to shorten our planning horizon to address the quarter and the month more than look out for the year, and we set up 2 key objectives. First was that we had to be sure that we will capture the recovery in domestic and overseas. June had already informed us that while we were expecting the recovery probably to go in stages, it had been very swift in coming back. And we thought that if that's what it's going to be the case in Q2, then we better be in position in our supply chain to capture that recovery. And the second objective, which we had set up for ourselves, was to protect our margins and our profitability. Our thinking was that the demand environment is uncertain. So it's imperative that whatever we sell, we make some good money on it. On one hand, we were doing -- there's a lot of pain in containing the costs, travel, capping salary increases and all these kind of things. So we had to be sure that on the margin side we didn't -- there were no holes in our bucket and nothing was leaking out, and we made strong efforts to improve our margins. So these are the 2 things, capture the recovery through agile supply chain and protect the margins. And of course, we had to do all this while ensuring safety and well-being of our employees and the larger -- of the larger organization. So with this context, the Q2 outcome has been absolutely as per plan. And even though we did face some additional and unexpected headwinds during the quarter. But overall, we are very satisfied because not only has the performance gone as per plan, but it has set us up quite well for the forthcoming periods, particularly in terms of the profile and competitive position of our different businesses. So volumes are down 10%, revenue is down 7%, margin is down only 1%, but PAT is down 19%. I'm sure all of you have seen these results. So the volume recovery is in line with the industry movement in domestic. But internationally, the -- I think our recovery is better than the recovery in the industry. And our supply chain response has helped us to post our highest ever exports in September. It is not -- it's a very complex overseas operation in -- we do high-end products, which are dependent on a lot of imports for KTM; 2 very, very ordinary products in different format; SKDs; localization; exports in parts; CKD and all that and the supply chain had to respond to all this. And I think its agility has helped us to achieve this record performance in exports. Margin performance is superior to last year and, of course, superior to quarter 1, but there's no point looking at that. But the margin performance is superior to last year despite the headwinds, which are -- primarily, the abrupt and sort of almost retrospective withdrawal of MEIS, which at 2% is a very significant thing for our level of exports. In view of the fact that the -- there was no clarity, we had to take the hit of Q1 and Q2 as abundant caution. Because of the retrospective nature of the policy, it's still very unclear. Subsequently, we have, of course, increased prices and passed on -- mostly passed on the cost of the MEIS withdrawal. But this has not been easy. It has taken a lot of understanding and being very laser sharp about our understanding of competition and opportunity in the overseas market, given that China, and these are not just Chinese brands, but Japanese brands manufactured out of China, which we are competing with. There has been intense competition everywhere. Second headwind, which, of course, was known, was that the three-wheeler business share in the mix has reduced. You all know that the overall margin of Bajaj Auto is very complex. It's a blended margin between businesses and geographies. And three-wheelers, with its very high level of profitability, that share of -- its share in the mix is reduced and adversely affected the blended margins, and this was known. However, despite these 2 big headwinds and some things here and there, smaller ones, the margin performance has improved. And this is primarily on the back of the expansion of the premium brands, which is Pulsar. We have sold our highest number of Pulsars in domestic and overseas put together in Q2. It's all very counterintuitive. One would feel and expect that -- and certainly, this was a matter of internal debate and discussion that whether in this environment we will be able to expand the Pulsar franchise. But we have been -- we are very happy that the markets have responded. In some places, we have been fortuitous like the return of Latin America, which is largely Pulsars and Dominars. So -- I mean it gives us a good share of Pulsars and Dominars. So that has helped in us record the highest number of Pulsars. The Pulsar franchise was also substantially expanded by the Pulsar 125, which has captured a 16% market share in the 125cc segment, actually despite being the most expensive 125cc. And in doing so, we think that we have actually expanded the 125cc industry itself from last year -- I mean FY '20, it was around 20% levels. But today, it is at 25% levels. And I think Pulsar 125 has been instrumental. It has taken share from all its competitors. This has not been on the cost of standard Pulsars. We were concerned about this. But the standard Pulsars, which are the 150 single discs and the twin discs have grown both here and overseas. The second thing, which has helped us, is that the ultra-premium end, which is the brands of KTM, Huskys and the Dominars, collectively -- these have collectively recorded, again, their highest level of sales. So the Pulsar franchise and the ultra-premium brand of the portfolio recording the highest numbers has significantly improved the margins. Finally, the margins were -- I had to mention that the entry-level portfolio, and some of you may recall that we had even talked about this at the end of Q1, but we spent a lot of time reshaping our entry-level portfolio by sharpening the portfolio and strengthening the margins of underperforming models. So this has enabled us to fundamentally improve the EBITDA performance of the domestic motorcycle business. We never get into segmental level margins. But suffice it to say that the domestic motorcycle business is if -- I mean from memory, if I look at the last 15, 16 quarters, it has never enjoyed such a high level of margins. And this has, of course, favorably impacted the overall margins of the company despite the headwinds of MEIS withdrawal and the reduction in the three-wheeler -- of the three-wheeler business in the mix. The decline of 19% in PAT is a combination of the base effect due to the one-off benefit last year of corporate tax, which was to the tune of INR 180 crores and the changes in treasury income due to the lowering of interest rates, et cetera. If we normalize for both of these, which is the right way to look at it because they are not mainstream business, then the change in PAT is really minimal. Quick comment on the different businesses, domestic motorcycles. We reckon that at an industry level demand appears to be almost at 90% level of previous same period. And the first few days of the season, we are like 5 days into the season. But everyone is looking at this period very, very carefully, almost on a twice a day basis, maybe we are over-diligent in our scrutiny. But whatever, the first few days of the season suggests that demand is at similar levels. The walk-ins, the inquiries, et cetera, seem to be at a similar level. So let's see how the next few days go. These are very important. However, we are very pleased in the domestic motorcycles. We have maintained our market share, while significantly improving the margins. So the portfolio is now aimed very, very strongly at the better performing segments of the industry. And if demand continues to recover, we should enjoy profitable growth, and we should outperform competition holistically. Domestic CV, it's a wait and watch as the recovery is very slow. We -- in May and June, we had slipped to 10% of normal levels. We are now -- I think the industry is at 25% of levels. Here, the passenger business is slightly 25% to 30%. Passenger business is at 20% levels, cargo business is at 40%, 50% levels. So that's doing much better. But cargo business is -- three-wheeler cargo is a much smaller component. So overall, we are still low. But every month, we are seeing 2, 3 percentage point improvement. The good thing is that we have adjusted the stocks to the normal levels -- the retail levels of the new normal. So therefore, going forward, we are largely -- retail is equal to sales dispatches for us. So that task is now behind us. And a market share, not much meaning at these low levels to look at market share, but always important to keep them in mind. What is great is that we are now at leadership market shares in almost all segments. We have made great strides in cargo where we were a late comer. We are now touching leadership in diesel. And of course, we are at an overwhelming share in petrol and alternate fuels. International business, there has been an outstanding recovery on the back of a stellar job done by the supply chain. I think it's difficult to get precise numbers. But just by the sheer observations we are doing on the field, thanks to our strong leadership positions of our brands in many, many markets, we have enjoyed a disproportionate share of the recovery. And we have, I think, increased our market share in at least 30 of the 70 markets we are in and which account for almost 80% of our business. We have delivered, as I just said, the highest ever sales in September. And we are well set to repeat that performance and establish a new watermark in October. And if I may say so, and if there is no issue with supply chain, I think, November should beat the October record. So that will be 3 months of setting new targets. So in conclusion, given the twin objectives we had set for ourselves, the Q2 performance has been absolutely on plan, and we are delighted that it has set us up quite nicely to keep driving profitable growth. With the premiumization at our end of domestic motorcycles, the return of three-wheelers albeit gradual, continued strong performance in exports and, hopefully, the governments will be kind and take a quick decision on RoDTEP, et cetera. Put all these things together, we should continue to outperform the industry with some profitable growth. With these sort of quick comments, we are now open to take your questions. Thank you.

Congratulations on the wonderful results. Raghu here. Just a couple of quick questions. Firstly, in domestic motorcycles, the executive and premium segments seem to be outpacing the economy segment, and you alluded to premiumization. So do you expect this trend to continue? And can you share a directional outlook? And second question was on other expenses, which has seen a fall of 23% versus volume fall of 10%. Can you highlight reasons for improvement?

Okay. So I'll take the first part of the question. I must say, Raghu, that when we were looking at all these things in June, we were concerned that in this environment, whether the, let's say, top half of the industry, how it will do. But of course, we were getting inputs from our partners in KTM that how Europe is doing well in the premium end. But India is India and not Europe. So we were certainly concerned. And to that extent, I must say we are pleasantly surprised that the Pulsar component has really outperformed. I'll tell you the 125cc, by far, the 125cc split disc is the most expensive 125cc in the market. But customers have preferred it. If I divide the market in disc and non-disc market, we've already got a 40% market share of the disc within a few months. Now this is -- suggest illuminating a consumer behavior, which is saying that, "I will be cautious. I will evaluate the value very robustly. But if I have to spend money to really get a good brand and a good product, I'm going to go for it." And I think this phenomena has helped us, definitely helped us in Pulsar 125. It has helped us maintain our business in the standard Pulsar. There is a little bit of a dip for us in the Pulsar 180 and 220 and NS, but that is really on the -- because we could not service our demand because of supply chain issues. And now we are refreshing the top end of the Pulsar range, which is the NS range in the next -- and the new ads are running. And you will see that our advertising is all on the premium range. So we are really backing up our belief now, which is quite substantially validated by the markets. We are backing it up with some spending on the TV, et cetera, in engaging with the customer. So I would say that in the top half of this segment, certainly, there is a good validation and premiumization and support from the customer for this should continue and should benefit the business.

So Raghu, on your question on other expenses, yes, there are 2 parts to it. So you're right. It has dropped by about 23%. About 2/3 of the drop is in marketing spend. That is a combination of 2 things. One, we have obviously been much more frugal and rational in doing our spends. Two, obviously, the other thing that has happened is the festive has got a little delayed. So those kind of expenditure has not come. They have come in a little bit of a lag. But suffice to say, at least more than half of it is actual savings that we have flown in. And the balance 1/3 of it is pure operating cost reduction. We continue to look at costs with the lens. We are anyway frugal. But because these are tough times, we are looking -- relooking and trying to see where all we can cut costs. Some of these costs would come back, like I said in the previous quarter's call also. When things are tight, you tighten your belt, but you can't have a tight belt for the whole of your life. So some of this will come back but they will come back in proportion to return of volumes.

Faizan, can we please open the Q&A?

[Operator Instructions] The first question is from the line of Binay Singh from Morgan Stanley.

Firstly, congratulations for a very good set of results, given the challenging environment that the business was facing. My question is on the point that Rakesh said, which is the domestic margins are at 15%, 16% quarter high. That's very encouraging to note. But how would you look at the sustainability of those margins? Was there any one-off element like, for example, inventory levels were tight in Q2, so sales promotion spend or discounts on vehicles were lower? Are you seeing that trending adversely in Q3? So if you could comment about sustainability of domestic margins in light of sales promotion or discounts that you see between Q2 to Q3? And also any cost pressure, especially on the raw material side that you see coming up?

So I'll take the second one first. Soumen here, Binay. Yes, there are cost pressures. I think at this time the local metals have taken a bit of relaxation and the base metals are doing the run. So we have cost pressures, but we believe that between some judicious price increases, exports doing well, ForEx not dropping any further, CV coming back, we will try and mitigate as much of that impact as possible and deliver market beating results in Q3. So the input cost is certainly a cause of concern, but not unmanageable. On the sales promotions, I think, the margins that we have delivered in Q2 in domestic two-wheelers is not completely out of the blue. It is not like we've got a couple of percentage points of benefit because of some one-offs. A bit of aberrations will happen here and there. But I think there have been structural changes, which have happened. And the whole story is the Pulsar story. I mean we are selling more of 125 Pulsar, which is a good margin compared to some of the other products that we had down under -- below the 125cc. And this is not impacting my 150cc and above in terms of cannibalization. So my overall mix, the quality of mix of domestic two-wheelers has significantly improved from a margin perspective. But yes, I don't rule out 50 basis points, 75 basis points correction between here and there because of some movement of sales promotion spends.

But just so summing up, like how would you see discounting trend in this festive season versus last festive season?

So we do not see any major discounting trends across the industry. I think these are trying and testing times. And I would like to believe that everybody in the industry will be reasonable. And whatever we see in the market as of now seems to be a reasonable approach by the whole industry. So we don't see too much of a discounting trend so far like a carpet discounting across all models, across all SKUs. We're not seeing that at all. But again, as Rakesh mentioned, we are 5 days into the festive. So let's wait and watch.

The next question is from the line of Pramod Kumar from Goldman Sachs.

Congratulations to the team. Rakesh, my question follows to what you said about premium category doing well, which is kind of understandable because the customer wallet there is much, much robust. But how would you see the relative performance of premium category in your semi-urban rural markets? Whether are you seeing the trend of premiumization even there with increased cash flows and better agri output? And also, if you can comment about the relative performance between domestic and exports from next 3 months to 6-month horizon as to -- or also if exports have kind of surprised you on the upside in terms of the kind of comeback? And also any color on the urban versus rural because rural has been a very dominating theme post COVID with underlying assumption that rural commuters will drive demand recovery. So if you can just throw some light on this based on whatever you're seeing at the industry level, sir.

Yes. Sure, Pramod. The -- see, it is very strange, but the way we are seeing it is -- and not just now, but I would say I've been examining this subject for some time. According to me, this whole urban and rural issue is just an issue of distribution. It is not an issue of -- which explains consumer behavior. We -- I can outline many urban -- deep urban centers where the product mix is largely entry level, and I can describe to you many so-called rural pockets where Pulsar is -- or Pulsar or the sports segment is a dominant player. So we find that these -- that the consumer is displaying the -- both types of behavior. So it's a bit erroneous for people to assume that there's a rural consumer behavior and there's a urban consumer behavior. It is just an issue of distribution of product and service. So -- and in keeping with that, we find that this whole -- the Pulsar franchise expansion and particularly the penetration of Pulsar 125, I -- just I was examining West Bengal and Bihar coincidentally last -- yesterday. And the uptake, even in the smallest towns, Midnapore and Katihar, and these kind of places is very, very strong. So I would say that this is not really a -- Pulsar is not an urban phenomena. I think it is a pan-India phenomena. And I would say that for almost every brand. Now in terms of the demand recovery, I -- what you said was true till about July and even, I would say, August -- middle of August, where we found that the mandi towns and the -- not deep rural but semi-urban and mandi towns, et cetera, were moving faster. But now we find that the -- if I keep the super metros aside, if I, let's say, keep Bombay, Delhi and a couple of other these metros aside, then the recovery is pretty even across the country. Yes, of course, there are some states which are doing better and some states which are not doing as well. But in those states which are doing better, then they're doing better across the so-called urban and rural sort of divide, as you say. And it could -- it is perhaps because of different reasons. And the third point I'm missing out you had said...

Domestic versus exports, Rakesh.

Domestic versus exports.

Yes. So what's it?

How is each of...

Yes. Has exports surprised on the upside and how is outlook versus domestic in terms of the next few months?

Yes. So just to complete the domestic story first. The domestic motorcycles, I would still say the fog of uncertainty is still surrounding us. And we have to see how this -- and I would say that it will still surround us for the next month or so. Because we have to see how the season goes. We are all optimistic about it. It is like this, Pramod. The first season mostly the pent-up demand would have exhausted itself, right? Whoever had to buy or not buy has taken his decision, and this is -- would be a closed chapter. Secondly, there is an underlying contraction of the economy and it is going to have some kind of an impact. And thirdly, there is always a celebratory nature to the festive and there's optimism, et cetera, which drives up the consumer behavior. So these 3 factors -- so that will be not there towards festive. And therefore -- and we will really know over a period of December, Jan how things are finally settling. What kind of an equillibrium are we settling into, whether it is equal, lower or higher. So I would say we are in the domestic motorcycles still very -- in an uncertain environment and difficult to hazard a guess. In the three-wheeler side, we had come down to such a level that it is now -- and it is so dependent on 2 things. One is -- actually dependent on 1 thing, which is the return of traffic on the streets, and that has started to come, even though schools and all have not reopened. And we are seeing many, many more three-wheelers. And we are seeing -- we're getting data from companies like Ola and Uber, and we're seeing that from almost 0 they are reaching 40% to 50% levels already of ride requests, et cetera. So we think that the three-wheeler business will continue to grow. And as we -- I mean as the drivers get more trip, the -- currently, the financiers have taken a cautious view because there is impairment of their income. But as the traffic returns and their daily income comes back -- right now, we estimate at 50% levels. As it comes back, the financiers will come out. And three-wheelers is almost 90% financed. And it will start to have a positive impact. And though slow, we definitely see the three-wheeler business improving step by step by step in the near future. International business, domestic is almost at 90 -- overall at 90% level. Sorry, motorcycles is almost at 90% level and three-wheelers is at 80% levels of retail because it's not so highly dependent on organized finance and the lockdowns have not been so severe. ASEAN area is at 50% recovery. South Asia and Middle East, apart from Sri Lanka, which has banned imports, is at about 90%, almost like India. And Latin -- Africa is at 90%, 95%. And Latin America is at about 80% and it has swiftly reached 80%, which has also given a flip to our Pulsar. My thinking is that it should go back to its normalcy. And I'm hoping that by January or by Christmas time -- and Christmas is festive in Philippines. Philippines is a very big market, very big and profitable market for us. And the festive should serve as a catalyst to help Philippines recover, which is what is going to help LATAM also come back to 100%. So I'm optimistic about the recovery. The currencies have held strong. Between, let's say, March and now, the currencies in some of our top 30 markets have not gone in for a tailspin. There has been pressure in Nigeria, but it's not gone into a tailspin and it is holding up. So if the currencies and the dollar with its softness sort of remains like this, and the currencies remain stable, then I think some of these emerging markets like Africa will not be under any pressure and their natural demand will start to come back. So I, definitely, am looking at some bit of growth in quarter 3 in our overseas business and also a little bit then in quarter 4.

And just a follow-up. Rakesh, on 125 Pulsar, do you see further upside to your segmental market share given that you said you are at around 16%? If there's any number you have in terms of mind as to where you can land it, given the product -- the brand, especially, and the differentiation what you have versus the commuter-oriented 125cc motorcycles?

Absolutely. Absolutely. We are seeing a major upside for us in this because we have not yet terminated the full country. We have just expanded our portfolio to include variants which will address different kind of customer needs. We had only addressed the top end. Now we have gone in with a lower-priced variant, which is Drum, et cetera. We have not stepped on the gas in terms of advertising. We are doing that now. And our entire effort is focused on to -- and if you move on to Pulsars and ground-level advertising, a lot of it is being done on Pulsar 125. So internally, we are absolutely driving towards -- going to be driving relentlessly towards leadership in Pulsars -- in the 125cc segment.

This is the operator, Mr. Kumar. May we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. We'll take the next question from the line of Kapil Singh from Nomura.

Firstly, I wanted to talk about your international market. You seem to indicate that the recovery in those markets is still not fully reached 100%. But when I see Bajaj Auto's performance, it's been exceptionally good in last few months. And as you indicated, it will probably get better. So could you give us some color that what exactly has been going right for Bajaj Auto that has helped you gain market share? And should we expect this gains to sustain? Also, you did mention some comments about price increases and competition from other players in China or Japanese players from China? Would the price increases have any kind of impact? So that's the first question. The second question is on the three-wheeler business. You had also mentioned last time that given the price increases in LCVs and three-wheelers, you expect the market to shift more towards three-wheelers. So currently, the data is not seems to be suggesting that. So some thoughts on that as well. [Technical Difficulty]

Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Over to you.

Sorry about this to everyone. My apologies that we got interrupted because I think the line at our end -- there was some problem. I know there's been a lot of thunderstorms in Poona. So maybe you can hear the thunder also. It's huge. Anyway. So I think the question asked was about international. So you're very right that we did -- we crossed 200,000 exports in September. We crossed it in October, and hopefully we'll cross it in November also. And this is -- so this signifies 2 things. I still maintain the number which I gave you about the market recovery because they are from the market end. And that's why I'm saying that we had a -- we are gaining market share in all these significant territories. There are 1 or 2 territories here and there where we have an issue. There are so many countries. But largely, our market share is on the move. And of course, there was a big lull in April, May. April, we did something, but May, June, there was a big lull, and we are catching up on that. So mostly, I think it is a combination of the catch-up of the gap in May and June. And secondly, certainly, at a ground level, we are gaining market share in both motorcycles and CVs.

Sir, can you hear me?

Yes, yes.

Yes. Okay. No, I think -- maybe you didn't hear the full question. So what I was also trying to get is some color, whether -- what are the reasons for this market share gain? And do you expect it to sustain, given the price increases that you talked about and the fact that you compete with Chinese and Japanese players, et cetera, as well? And the second question was on the three-wheeler cargo business, where you had last time talked about that BS VI price increases are lower for three-wheeler cargo compared to LCVs, so market would shift down. So at least it's not visible in data right now. So some thoughts on that.

Yes. Sorry, probably I lost you. Yes. So if you see, we've got a -- this is one of the things which is perhaps less understood and even less appreciated about our international business that it is not a B2B business. It is a -- so it's not that we are selling to some distributors and then forgetting about it. It is a B2B2C business. We understand each of these markets, whether it's a Haiti, a Cambodia or a Nigeria or a Bolivia or Argentina as much, if not better, than our partners over there. Our teams know the geography. We do a huge amount of investigation in consumer behavior. We understand service requirements, warranties and lots of stuff over there. As a result of which, we've got a very customer-facing position in these markets. And in -- like I said, 80%, 85% of our revenue comes from markets where we are #1 or #2, with a minimum 25% market share. So we have significant participants in the industry with a direct interface as Bajaj brand and with Bajaj people in the marketplace. It's just that the physicality is managed by our distribution partners of assembly, distribution, retailer management, et cetera, and service. So therefore, when you are in leadership position, in times of difficulty, there is a fair advantage, which you start to get, and that is the thing which we are harvesting in my opinion. And so all the stronger markets have grown stronger. I mean in a place like Africa, now almost every second -- between second to third bike which is sold across the continent is ours. So that amounts to a solid brand presence. So I think we are just harvesting that in our top 30 markets or so. And the second thing which -- and the second point which you had asked was...

The three-wheeler business versus LCVs.

Three-wheeler versus LCVs. So yes, unfortunately, whether it has actually played out that way or not, is not something which we'd know because if the industry crashes by 90% in Q1 and by 75% in Q2, it's very difficult to differentiate between the sharp and the weak. So only when the demand comes back and people buy more of it will we know whether that shift from four-wheel cargo to three-wheel cargo has happened or not.

The next question is from the line of Gunjan Prithyani from JPMorgan.

2 questions from my side. Firstly, on the financing side on the 2-wheeler. If you can share some thoughts because, clearly, the captive financial brand, Bajaj Finance, has been talking a bit more cautious on this group. And as per their comments, clearly, their share has gone down in terms of refinancing to you. So how are we really addressing this step back from that? And if you can just share some light on how the financing plan has been played out for you in the last -- versus last 2 quarters to this quarter?

Yes. So the financing -- definitely -- when COVID first started, definitely financing got hit. And I do think that in -- let's say, in -- April, May, in any case, was a washout, but I do think that in June, et cetera, we did lose some bit of financing say because of cautious financing. Now it's coming back. The -- like Bajaj Auto Finance is an absolutely first-class financing organization on an independent basis. We have also got relationships with -- strategic relationships with a couple of others, with HDFC, et cetera, and financing is coming back. It's -- I would still say compared to Q1 -- let me say, compared to June and July, August and September is an improvement, but it is still about 5, 10 percent points, 10 percent points behind the same period last year. So there is scope. I'm hoping that in the season period we will see financing, Bajaj Auto Finance, plus all the other financing combining to reach the similar levels of penetration as last year, and it will be very good for the business. And this is a point which is very important also, and now that you raised it, I might as well touch upon it. It is something -- some people have said this is counterintuitive that this -- in this environment, the upper end of the portfolio, the top half, the pyramid has grown. But one of the reasons for that is also that finance is more forthcoming for that customer. For the entry level customer, the financing is far more cautious. And we have seen that for -- that whether it's a KTM customer or it's a Pulsar customer, whether Bajaj Auto Finance or any other finance, it's far more forthcoming, and they also need their top line. So they've been going after those customers. And that also has helped us drive the premiumization of the portfolio. So I would say a bit behind but returning quite well. And I think by October, November we should be through.

Okay. But is it possible for you to share if, let's say, financing you mentioned is 5%, 10% lower. So my guess is it would be at somewhere around 30-odd percent -- 30%, 35% odd levels. And if BAF's still the dominant, if you can share how much is BAF of the total financing, if you can share some numbers around this?

Yes. So currently, we are operating at about 50%, 52% being financed. Of the 52%, close to 60% is BAF as of now.

I might just add that if I just take September itself, then the financing penetration will be 63%. So what numbers Soumen has given you is for the quarter. But that is the point I wanted to make that every sort of month, it is coming back. And if it continues at this rate, then it will reach 70%, 72%, which was the normal level of FY '20.

Okay. Got it. And the second question I had was on this comment you made around retails and wholesales being matched in the three-wheeler business in domestic. But in the two-wheeler business, clearly, we wanted to be positioned for the festive. So if you can share some comments on how much inventory is there in the channel as we get into the festive? And is that an area of concern like last year?

Yes. So yes -- see, we are in line with the -- as we see what inventory levels we need to prepare for the festive. It's a little bit of a gamble. There is no doubt about it because we are not sure -- none of us is sure about how the festive goes. But all of us are sure in the company that it's an important window, which we cannot afford to miss because we didn't have stock on the ground. The dealerships -- the dealers are very clear about it. We are very clear about it. So we have -- perhaps it's better to err on the side of abundance and make sure that the stocks are, for 2 reasons. One is that the demand is coming in surges. Number two, there is fragility in the supply chain in any case. So we don't want to be in a season time and because of some component not being available or some transport system not being available we are not being able to transport the goods and the demand comes and goes and we are left stranded. So we took a call that we are going to go with having a decent level of stocks. And normal level of stocking for the season is 45 to 48 days. This is what it has been for the last few years. We feel that prepares the deep distribution to take care of the demand surges, and we are at those levels. And I think given the numbers that we are seeing, the stock addition in our case has been lesser than competition, but we feel that this covers us adequately. Of course, in the event that the retails don't match up, we'll obviously have to take some action in November production.

The next question is from the line of Kumar Rakesh from BNP Paribas.

Most of my questions are answered. One question. So you talked about that we have retained our market share in the quarter and have expanded the margin. Earlier, we had talked about an aspiration of expanding our market share. So in the coming quarters, how we would be targeting that? Will we be looking at recovery most importantly or we would be looking at the market share expansion as well?

See, quite frankly, when you're running a business, these are not binary decisions, which you take. It is not that you go after market share or you go after margin. Really a good business -- a hallmark of a good business is that you attempt to do both within certain boundaries, right? And Bajaj Auto has always pursued this. I mean at an overall level, we do not subscribe to a profitless pursuit of market share. We do undertake the challenge of increasing our market share and maintaining our margins. A little bit here and there for other reasons is different. So we will continue to abide by that philosophy. We are, obviously, going to keep driving the market share. The environment makes it more difficult in a market which is contained and it is not exhibiting a lot of flair. It is difficult to bound towards very high market share increases. But we will keep chipping away. We've got -- we think we've got a very good margin architecture now. We will preserve that, and we'll chip away at the market share. We will do it on the basis of expanding the 125cc category, holding our market share in the sports category and taking the top part of the entry-level segment. So furious expansion in the middle, hold the leadership in the top and skim the top of the entry-level on the basis of meaningful innovations at the bottom segment. That would -- that is our three-pronged approach.

That's insightful. And just a follow-up on the three-wheeler part. You said that the volume has fallen dramatically in the last couple of quarters. And hence, from here on, it should start seeing recovery. But from -- it would still need a catalyst for a meaningful recovery in the demand of three-wheelers, especially on the passenger segment. So what are the catalysts based on your reading of the market? You have been the market leader for several years. What is your reading that what potentially could be the catalyst, which can start revising the demand of the three-wheeler?

It's a very difficult situation because really, the whole thing pivots on the earnings of the driver, on the basis of which the financier assesses the credit risk. Now if the traffic on the road doesn't increase, and there is no silver bullet for that, except -- now the lockdowns have receded, but the schools are closed. People are not going to the restaurants. And offices are opening up, but still a lot of offices are closed and there is work from home. And if these things don't completely normalize, and they're normalizing only very, very slowly, there's no silver bullet, which will make people come out on the roads. Then there is the financier bit. I think whatever had to be done by the government and all that, that has been done. And the financiers are taking this on board. There are some which are more sort of aggressive and some are very cautious. So I personally feel that it is very difficult to put a finger on a silver bullet or on a catalyst which will suddenly make some change. One thing which could -- which would be most helpful is -- or a couple of things is, from the government side, is to -- and which we have been through the offices of CM, et cetera, we've been in discussion, is if the scrappage policy is brought into play fast and all three-wheelers and all these things are scrapped, which can be replaced by new. Second, inexplicably, we continue to persist with the permit culture. We prefer to allow the running of ramshackle, silly dilapidated, imported three-wheelers from China which is based on lead acid batteries and called e-ricks and really they have a very short life and very short buffer. And these are allowed, and these are -- I mean they don't need a permit and they're running because the needs -- mobility needs of the country are growing and growing. And if the three-wheeler is unchained, then that could be the catalyst. So I would say from a corporate side, very difficult to catalyze things, whether it's financier or whether it is a company -- a product company like us. Consumer side, very difficult. But policy action, these couple of things can certainly inject some energy into the sector.

The next question is from the line of Aditya Makharia from HDFC Securities.

Rakesh and Soumen, congrats on a good result. I just had a point on exports. Obviously, Nigeria is one of our larger markets and there's been some civil disturbance there. I think it started last week, but it's turned a bit violent and that too in the large cities. So is there anything we should read into for this? And secondly, whatever said and done, oil prices remain around $40. So I mean, earlier $50, $55 used to be the breakeven where these economies used to stand back on their feet. So what are your senses on the economic recovery there?

Yes. This -- I mean it worries us also, the shooting incident, et cetera, in Lagos and all that. But I'll tell you, over the last 12, 15 years of our life in Nigeria we've been through such cataclysmic events, whether it is the Kohram or it is a huge devaluation of the currency or change in regime and Eastern region going into a tailspin and this ban and that ban that we tend to take it in our strides. I'm really hoping -- we worry about the safety of our larger organization always. And I'm really hoping that this sort of blows over. I'm quite confident. They are a very resilient nation. I'll tell you, having visited it many times and knowing many people over there, it's a remarkably resilient nation. The people over there are extremely tough. And so they bounce back very fast. So I'm hoping that this is not going to come in the way. And some interruption will be there, but it should carry on, according to me.

Sure. And the second point on oil prices and economy.

Yes. So that -- what's happened is, I think over the last couple of years, there was a time when everyone was building big, big castles based on the $100 kind of watermark which had been reached and then it tumbled. And there is far more acceptance of reality and a lot of budgeting and et cetera. The managing of the fiscal situation is done on the basis of a more real understanding of the oil prices. And they have been largely sort of rain bound. So this kind of a movement is not impairing the consumption, the purchasing power as yet of the country. But the one thing which I would sort of watch out for is the currency because that immediately impairs the purchasing power. The rigs been a bit soft, as you know, and we are watching that very carefully. The political disturbance will come and go. Oil prices sort of factored in, but currency has to be watched carefully.

Thank the next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

You talked about first 5 days of Navratra is seeing stable Y-o-Y inquiries and footfalls. Would actual retails also be flattish or that is yet to catch up?

I talked about -- this is on the basis of retails only. This is not dispatches. Dispatches now, we're all done with the stocks that are on the ground. The number which I gave you about it being sort of equal. I mean, numerically, it is slightly ahead of the same 5 days last year, but the same 5 days last year also had a month end over there because the same 5 days at 29th September to 3rd October and right now it is 17th to 22nd. So you read that month end effect. If you normalize for that, we are equal -- sort of equal in retail.

Okay. Okay. And second question is to Soumen. On the cost side, we have seen RM costs increasing on Q-o-Q basis is just the mix and MEIS impact or we have already started seeing some impact of cost coming in?

Q2, there was no major cost impact. Q1 and Q2 was similar. It is more to do with MEIS so the percentage would have gone up. Plus, I know there are certain schemes which are netted off from top line. But net-net material cost did not move significantly between Q1 and Q2. Q3, there is a significant increase.

Okay. And based on the current prices, commodity price, it would be what, upwards of 100 basis point on aggregate level?

At a gross basis, it would be more. We'll obviously try to mitigate that impact. But on a gross basis, it will be more.

Okay. And lastly, on the staff cost, is this run rate sustainable at INR 325 crores to INR 340 crores a quarter? Or as things normalize, this will further go up?

As of now, I think, for this year, you can consider this as a stable run rate.

The next question is from the line of Ashutosh Tiwari from Equirus.

Congrats on a good set of numbers. So firstly, we talked about two-wheeler export demand reviving within the key markets. What about three-wheeler demand over there? What's the trend over there?

Three-wheeler demand in export markets.

In international markets?

Yes, yes, international markets.

So three-wheeler demand in international market is much better than India. We are at about -- I would say, overall level, we are at 80% level, 75% to 80% level of -- the big sort of issue is, frankly speaking, only ASEAN, which is big markets for us are Cambodia, Myanmar, Philippines. And these are still way below 50%. But Sri Lanka has banned the import. But Bangladesh, Nepal, Egypt, Iraq, many countries in Africa, Mexico, Peru, a lot of these big markets of three-wheeler for us are back to about 80% levels.

Egypt, we had issues earlier in FY '20. So now what -- where we are there basically in terms of pre-event, if you can share?

Sorry. Can you repeat the question because...

Egypt, we had an issue in FY '20 because of the curbs over there in the three-wheeler sale. So where we are now with the earlier, say, pre that event levels...

We have still not reached, but Egypt is a remarkable recovery for us. And the local authorities are very supportive because of the entire localization effort, which has been put in Egypt, which is generating employment in local industry over there and on the back of which there is a very good flow of licenses, as they call it, for manufacturing the three-wheelers. We are -- also, there is a very good positive move from the government to ensure all three-wheelers are registered. And we are working very -- our distribution partner is working very closely with the government of Egypt to make sure that these registrations are complete. And on the basis of both this work, we have a 90%, 95% -- I think 95% or if not 98% market share of three-wheelers over there. And every month, it is growing.

Okay. So that must be helping versus last year basically? Okay.

Yes.

And lastly, can you share the export sales and the spare parts sales numbers?

Yes. So the spare parts revenue for Q2 is about INR 733 crores. And what else do you want?

Export revenue in dollar and rupee terms.

Export revenue is about INR 2,800 crores.

And in dollar terms?

Dollar terms, just a second. We'll give it to you. In case -- I'm not carrying it. In case we can't, then we will send it off to you later.

And just one more thing on this because now rupee has appreciated, so will the realized rate would fall in the second half or next year? And what was realized rate in the 2Q?

2Q, we realized about $74.

Okay. So not very different from current levels?

Not very different, but the current level is 20 days old into the quarter. We don't know what will happen.

The next question is from the line of Venugopal Garre from Bernstein.

I have 2 questions. The first one is the regulatory side of things and actually you touched upon that earlier in the call. On the scrappage policy side, since it's been under discussion for almost 12 months now, and it looked like it's going to come through even last month based on the comments from the ministers. What in your view is potentially the driver for the delay? Is it still something which you could expect this year or is it more that the government doesn't want to burden customers during COVID, so we'll probably have to wait for slightly longer?

Yes. It's anybody's guess because I've been personally in meetings where we have found both the bureaucrats and the political leaders very supportive of this. We can see the merits, both in terms of what will -- economically and also for the environment. I guess your second part of your question answers it. There are different type of lobbies which the government has to consider and satisfy itself that they will not be changing anyone. And I guess it's that process, which is taking long. But frankly, we have not really come across any vocal opposition for it. So having said that, I really can't tell you. It's not in my power to tell you when it can happen. We keep feeling it's imminent, though.

Sure, sure, sure. One -- another small one question on the same regulatory side of things. MEIS, with the scheme, sort of moving on to another scheme, there's, of course, a net impact which you're passing it on through price hikes. So is there any discussion around any alternate schemes which probably could still be -- not challenge any WTO side of things, something like, let's say, production linked incentives for autos, especially on the export side, which could be anticipated or under discussion?

Yes. So you know that the RoDTEP is there, which is really about assessment of the sales on taxes and exporting taxes on taxes kind of a thing and mitigating that. Apart from that, there have been -- in this period, I must say that there have been several outreaches from the government to bodies like SIAM. And as part of SIAM, we have been engaging through SIAM and as part of SIAM we've been engaging with the government. Lots of ideas have been discussed. I must say that the dialogue, which is occurring, is at a much higher level. And these ideas have been taken, and we know that they are being discussed within different ministries. And their objective is to really enable authentic -- to enable and push for authentic exports, which are not trading or anything, but which will be sustainable. But these have to be -- these ideas have to land and those schemes have to be announced. That is -- we are also waiting for them. But that discussion is very much on.

One small thing you mentioned about entry-level financing, of course, being a bit more difficult. I wanted some color on this. So are you actually seeing customers working in wanting to buy entry level, but eventually financing not getting approved? So are you seeing lost sales? Or is it that you don't really end up seeing these guys actually coming in to a retail outlet?

Yes. Now there are people who are able to understand their financing profile and [Technical Difficulty] itself in terms of the kind of loan-to-value, which can be offered and which people find it difficult, they're finding it difficult -- they know that they're not going to be able to give the EMIs, et cetera, at that level. So a lot of the customers are not coming in. We have also noticed that the secondhand -- the used motorcycle market, the stock appears to have substantially reduced, which suggests that a lot of people who could have gone for entry-level have opted for a used vehicle.

The next question is from the line of Hitesh Goel from Kotak Securities.

So I just wanted to check, if I remove the INR 78 crores impact from the gross profit per vehicle, it comes from 20,600. So just one clarification that that's the normal level of profitability now, excluding the MEIS scheme, right? Am I right in that observation?

Yes. Mathematically, you are right.

So I mean, I just want -- I was just looking at product mix. Last year, this number was close to 19,300, which has made substantially in the first half this year. And we have seen that you've launched Pulsar 125. So the mix in the premium segment is diverted towards Pulsar 125 and the three-wheeler -- domestic three-wheeler has taken a substantial hit, right? So just wanted to get a sense. What are the drivers for this gross profit per vehicle improvement? Is there a substantial improvement in the export business -- motorcycle -- export motorcycle business? Or within -- Pulsar 125 is also very profitable? Just some sense on that.

So you are comparing Q2 over Q2?

No, sir. I'm saying FY '20, if I look at, the gross profit per vehicle was close to 19,300, and it has moved to around 20,500.

FY '20 to Q2 '21, you will have a fantastic improvement first of all because of ForEx. My FY '20 ForEx was about INR 71, which has now become about -- in Q2 was INR 74.05. So that's a good 5%, 6% improvement. That is the first benefit that you've got. Again, as you rightly said, that Pulsar 125 has made a significant difference because the mix in the domestic motorcycle business has significantly improved in terms of profitability while keeping the volumes through our desired levels. These 2 coupled with -- because we are looking at gross margin, so the cost and advertisement will not come. So these 2 have really helped in improving the EBITDA -- the gross margin profile in this quarter versus full of last year.

And just my second question is on the increasing input cost that we are seeing in the next quarter, which can be to the extent of 1% to 2% on the margin, depending on the price increase we give to suppliers. So how much of that can we pass on? And also the MEIS impact that you're going to -- is there. So you talked about taking margins from 18% to 20%. So what is the time line for that? And how will you pass this input cost pressures? Can you pass on fully -- full impact or it will be a mix of cost-cutting and site closures?

So this is a very loaded and a risky question to answer. So I'll not give you a straight answer on questions like when will we go to 20% and will the whole cost be transferred. What we are saying is we have adequate means between price increase, cost optimization and indeed product mix, especially with three-wheelers with such a headwind till Q2, that we will be able to mitigate a large part of the costing. When will we reach 20%? We will reach 20% when all the jigsaw puzzle pieces fall together, which currently is not falling. I mean by the time -- if rupee continues to appreciate, then we will have a headwind which we'll have to manage. So let's look at 20% as a North Star, which guides us towards what we need to do. Let's not put it as a cage in the ground and say, I need to reach there. We will reach there sooner than later. Cost increase, yes, in a mix of multiple actions, we believe we will be able to pass a large part of it too.

Ladies and gentlemen, due to time constraint, we will take that as a last question. I would now like to hand the conference over to the management for closing comments.

Thanks a lot all of you for taking time out and dialing in. I think the numbers have been great. We delivered a decent top line, especially as we exited the quarter. The margin profile has improved. Individual businesses have improved the margin profile. But if there were to be 2, 3 big takeaways, as Rakesh mentioned in the opening comments, I will wind up with them. First and foremost is premiumization. Whether it is Pulsar, whether it is KTM, both of them have done highest ever quarters. Everything cannot be just a coincidence. So clearly, the premiumization story is playing out. Second, the fact that Pulsar 125 is doing so well. And third, exports doing so well. So I think we are slated for a good run. We believe that we will be able to deliver and go beyond the expectations. Now we'll keep our fingers crossed and hope that the festive goes well. And after that, the demand continues to remain buoyant and the industry improves. You may have some further follow-up questions. I'm sorry, there were some further questions on queue, which we could not take up. Please feel free to reach out to either Anand or to me, and we will be most happy to take on those questions one-one. Any further clarifications can please be directed towards either Anand or to me. Thank you.

Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.