Here’s why Bajaj Auto doesn’t mind selling a motorcycle model at a loss

Bajaj Auto, the country’s fourth largest two-wheeler maker, has been forced to sell one of its models below cost price, as the company chases new customers in the budget segment.

The Pune-based company cut prices of the CT100 (kick-start variant) by a whopping Rs 3,000-3,500, which is now priced at Rs 30,714, making it the cheapest two-wheeler in the country.

The CT100 is now priced lower than even the TVS XL100, the gearless moped priced at Rs 32,909 (both prices ex-showroom, Delhi).

The budget bike segment caters to extremely price sensitive consumers especially in rural markets, which is where mileage is of prime importance. Bajaj’s move to cut prices comes at a time when the rural market has seen a strong revival in demand in recent months.

Hero Motocorp, the country’s largest two-wheeler maker, is the leader in the budget bike segment with a share of more than 70 percent. It sells models like HF Dawn and Splendor in this segment.

In a recent post-earnings call, Kevin D’Sa, president (finance), Bajaj Auto stated that the price cut was done as it was important to maintain the walk-ins of consumers into Bajaj showrooms even though the cut would result in selling the bike at a loss.

“We have taken a price cut of Rs 3000-3,500 on the CT100. This is done mainly for the marriage market and once that is over one always has the option to relook at the prices. At the overall level we would be making a bit of negative EBITDA. But this helps in oiling the entire system, for instance the dealer viability, customer walk-ins, vendor supplies, utilization of capacity, overall lowering of fixed costs and operating leverage so those benefits come in,” said D’Sa.

Bajaj’s other budget bike Platina (priced at Rs 47,155), logs in just a single digit margin, further intensifying pressure on the company, which prides in the 20 percent EBITDA margin every quarter.

Waiting period

The strategy could be working for the company.

D’Sa  stated that presently the CT 100 range (it has three variants) carries a waiting period as Bajaj is not able to meet demand. An electric start variant of the CT100 was launched last financial year.

Both Platina and CT100 make up nearly half of Bajaj’s sales as of last month. While Platina sales grew 49 percent, CT100 sales jumped 33 percent in April, together selling nearly 100,000 units a month, after the price cut.

But in order to protect its margins Bajaj Auto raised prices on all other products, except the Pulsar 150 standard where it dropped prices by up to Rs 2,500. The company raised prices in the range of 1-1.5 percent this month, the second time in three months.

The Pulsar range generates average margins of 20 percent while three-wheelers remain the most profitable product for the company with an unbeatable margin of 25 percent. Operating EBITDA margins stood at 19.4 percent during Q4FY18.

“The customer acquisition cost will go up and so will advertising and marketing costs. Dealer incentives will remain stable at 4.5 percent and raw material costs can be passed on,” added D’Sa.