Oct. 19 (Bloomberg) -- Bajaj Auto Ltd., India's second- biggest motorcycle maker, posted an unexpected gain in second- quarter profit after it raised prices for some models. The stock gained the most in two weeks.

Net income rose 5.7 percent to 3.36 billion rupees ($85 million) in the three months ended Sept. 30, from 3.18 billion rupees a year earlier, the Pune, India-based company said in a statement today. That topped the 2.85 billion rupee median estimate in a Bloomberg survey of nine analysts.

Managing Director Rajiv Bajaj, 40, is introducing more motorcycles with engines bigger than the entry-level 100-cc model as rising incomes in the world's second-fastest growing major economy help more people afford expensive models. Bajaj's bigger rival Hero Honda Motors Ltd. yesterday reported earnings that beat analyst estimates on sales of pricier motorcycles.

``Disposable incomes have gained in India,'' said Sanjay Sinha, who manages the equivalent of $3.6 billion in stocks at SBI Funds Management Ltd. in Mumbai. ``The biggest concern for motorcycle companies in India is the very strong competition.''

Bigger Engines

Sales of entry-level motorcycles such as CT100 declined 22 percent in the last quarter compared with a 16 percent gain in models with 125-cc engines, the company said. Bajaj accounts for almost 47 percent of the total market in India for motorcycles with engines of that size or bigger, it said.

``Bajaj Auto will continue to focus on the profitable 125- cc-plus segment,'' Sanjiv Bajaj, the company's finance director, said in a statement. The motorcycle maker will increase production of the 125-cc XCD model to 75,000 units a month by January, he said.

The rise in earnings is the first in three quarters for India's oldest two-wheeler maker. The net income in the second quarter is the third-highest ever in a quarter, according to data compiled by Bloomberg. The profit was higher than the estimates by all nine analysts in the survey.

Bajaj Auto rose 53.35 rupees, or 2.2 percent, to 2,514 rupees at 2:16 p.m. in Bombay Stock Exchange trading. The stock fell as much as 2.5 percent earlier in the day.

Sales of motorcycles, scooters and three-wheeled auto rickshaws fell 13 percent in the second quarter to 614,093 units as five-year-high interest rates in India damped demand, the company said. Sales include exports, which gained 42 percent to 158,218.

Net sales fell 3 percent to 23.62 billion rupees.

Raw Materials

Profit also increased because Bajaj cut spending on raw materials such as steel and aluminum, its biggest expense, and raised prices on models for export from Sept. 1. Raw materials spending fell 3 percent to 16.61 billion rupees.

That helped improve the operating profit margin in the second quarter to 15.8 percent, compared with 13.2 percent in the preceding three months, Bajaj said. Operating margin is earnings before interest, tax, depreciation and amortization as a percentage of sales.

Bajaj Auto, which will be split into three separate companies by the end of this year, also runs an automobile finance company and has joint ventures with Allianz AG to sell insurance.

To contact the reporter on this story: Anand Krishnamoorthy in Singapore at anandk@bloomberg.net

Last Updated: October 19, 2007 06:01 EDT