Bajaj Auto Ltd., India’s second-biggest motorcycle maker, reported a worse-than-expected 11.3% drop in quarterly profit on Wednesday as higher costs dented margins and investment income fell.

But analysts told Reuters its margins and unit sales would improve in the next two quarters, helped by the launch of high-priced new models in the world’s biggest motorcycle market after China.

Bajaj, which also makes scooters and dominates the market for three-wheeled motorised rickshaws, reportedly said net profit dropped to 1.79 billion rupees ($US39 million) in its second quarter to the end of September from 2.02 billion a year ago.

The median in a Reuters poll of 12 analysts’ forecasts was for a net profit 1.91 billion rupees.

Bajaj’s sales, net of excise tax, rose 16% to 14.48 billion rupees, while other income, mainly returns from investment, fell 25% to 882.7 million rupees, the report said.

Last week, market leader Hero Honda posted a 24.2% rise in quarterly profit to 1.94 billion rupees, Reuters noted.

Bajaj, which uses technology from Japan’s Kawasaki Heavy Industries for some models, reportedly increased motorbike sales by 34.5% in July-September to 336,425 units, better than the industry’s 18.8% sales rise.

But earnings growth was hurt by a sharp increase in prices of steel, plastics and rubber as well as stiff competition that forced it to offer discounts in the $4 billion market. Returns from its cash pile of more than 40 billion rupees also fell, the report added.

Operating margin, a key measure of efficiency, fell to 16.54% in the quarter from 18.18% in the year-ago period, but it was up from 15.04% in the preceding three months, Reuters said.