123Pune.com

July 10 (Bloomberg) -- Bajaj Auto Ltd., India's second- biggest motorcycle maker, gained the most in more than a month in Mumbai trading after saying profit margins will improve with the introduction of pricier models.

Bajaj Auto rose 14 percent to 515 rupees on the Bombay Stock Exchange. That's the biggest gain for the stock since it re-listed on May 26 after the Pune, India-based company was split into three units earlier this year.

The motorcycle maker, which has teamed up with Renault SA to build $2,500 cars in India, said it will introduce more 125-cc and bigger motorcycles to boost profit after first-quarter net income fell 4.4 percent due to higher spending on raw materials. Bajaj Auto and its competitors are betting on selling bigger two- wheelers in India and overseas to counter an erosion in margins.

``Going forward, the margins will improve,'' said Ashutosh Goel, an analyst at Edelweiss Capital Ltd. ``Their exports are doing well and the product mix continues to improve.''

Bajaj Auto had a profit of 1.75 billion rupees ($41 million), or 12.1 rupees a share, in the three months ended June 30 compared with 1.83 billion rupees, or 14.8 rupees, a year earlier, the Pune, India-based company said in a statement today. Total revenue climbed 9.3 percent to 23.4 billion rupees.

Operating margin in the quarter was 11.5 percent compared with 13.4 percent a year earlier, the company said. The operating margin is earnings before interest, tax, depreciation and amortization expressed as a percentage of sales.

The company ``anticipates an improvement in margins,'' Kevin D'sa, the company's vice president in charge of finance, said in a statement. Bajaj Auto will also start selling new three-wheelers that will help improve margins, D'sa said.

XCD, Pulsar

The company's current line-up of pricier motorcycle models include the 125-cc XCD and the 220-cc Pulsar. Profit margins on such models are typically higher, according to Goel. Bajaj Auto sold 198,717 vehicles in overseas markets in the first quarter, up 33 percent from the year-ago period. Sales of Pulsar and XCD models gained 21 percent in the period.

Still, sales may slow in the coming months because of six- year high interest rates and the fastest inflation in 13 years, said Vaishali Jajoo, an analyst at Angel Broking Ltd. in Mumbai.

``We may have a subdued growth this year,'' said Jajoo, who estimated a net income of 1.98 billion rupees for the quarter. ``We need to watch out for the impact of interest rate increases,'' she said before the earnings were detailed.

Higher Rates

State Bank of India Ltd., the nation's biggest, and rivals raised their lending rates for auto and consumer loans after the central bank increased its repurchase rate 0.5 percentage point on June 24 to 8.5 percent to curb inflation.

Rising interest rates and the lack of finance options continue to restrain industry growth, D'sa said. Bajaj Auto will introduce two new products in the commercial vehicle segment and four new motorcycles in the year to boost sales.

The motorcycle maker's spending on steel, rubber and other raw materials increased 11 percent in the quarter ended June 30 to 16.19 billion rupees after steel prices increased.

Bajaj Auto said it has set aside an ``unrealized loss'' of 979.5 million rupees because of foreign currency fluctuations. The company said it's carrying this forward as a hedging reserve.

The automaker was split into three units earlier this year to boost shareholder returns and give more management control to Chairman Rahul Bajaj's two sons, Rajiv Bajaj and Sanjiv Bajaj. The predecessor company was split into a motorcycle unit, a finance company and a holding company.

The motorcycle maker got 15 billion rupees from the split of the former company to expand into new businesses such as making light trucks and ultra-low cost passenger cars.
http://www.bloomberg.com/apps/news?pid=20601091&sid=aX3HKLeQtXVs&refer=i...